Question

Find the duration of a 3-year bond with annual coupon payments of $80 and a par

value of $1,000. The current market price of the bond is $950.25. If the YTM of

the bond dropped by 1%, what would happen to the bond price?

NOTE: please help especially on the duration part

Answer 1

First, Calculate YTM of the bond

We know that,

Current Market Price = C*(1-(1+YTM)^-n)/YTM) + Face Value/(1+YTM)^n

Where CMP = 950.25, C = 80, n = 3 years

YTM of the bond through trial and error method comes out to be 10%.

Calculation of Duration

For your reference and understanding, I have also found the prices at 10% and 9%(i.e decrease in 1% as given in the question)

If you have any doubt, you can ask me in the comment section.