Question

A 20 year bond pays an annual coupon of 6%. The current YTM is 8%

1) What is the duration of this bond? (Use the excel file for Chapter 11 to help you figure out the answer)

2) If YTM decreases to 7.8%, what is the change to bond price according to the duration formula? What is the change to bond price predicted by bond value formula?

Thank you for answering the question!!!!!

Answer 1

Bond Price	$803.64	$944.91	If Yield Changes By
Face Value	1,000	1000	Bond Price Will Change By
Coupon Rate	6.00%	6%
Life in Years	20	20	Modified Duration Predicts
Yield	8.00%	7%	Convexity Adjustment
Frequency	1	1	Total Predicted Change
Macaulay Duration	11.23		Actual New Price
Modified Duration	10.40		Predicted New Price
Convexity	160.41		Difference
Period	Cash Flow	PV Cash Flow	Duration Calc
0	($803.64)
1	60.00	55.56	55.56
2	60.00	51.44	102.88
3	60.00	47.63	142.89
4	60.00	44.10	176.41
5	60.00	40.83	204.17
6	60.00	37.81	226.86
7	60.00	35.01	245.07
8	60.00	32.42	259.33
9	60.00	30.01	270.13
10	60.00	27.79	277.92
11	60.00	25.73	283.06
12	60.00	23.83	285.92
13	60.00	22.06	286.80
14	60.00	20.43	285.99
15	60.00	18.91	283.72
16	60.00	17.51	280.21
17	60.00	16.22	275.67
18	60.00	15.01	270.27
19	60.00	13.90	264.15
20	1,060.00	227.42	4,548.42
		Total	9,025.44

Duration for the bond= 11.23

2) Change in Ytm = -0.2%
Change in bond price = -(11.23*-0.2)%=2.25%
New bond price = $839.05