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The United Kingdom 10-year Government Bond (UKGB10YR hereafter) was issued in 3/30/2020. Assume that the coupon...

The United Kingdom 10-year Government Bond (UKGB10YR hereafter) was issued in 3/30/2020. Assume that the coupon rate is 5 percent per year. For a bond’s principal equal to £10,000 the simulated market price is £14,548. Assume continuous compounding.
(a) Using Microsoft Excel, compute the yield for the UKGB10YR.
(b) Compute UKGB10YR’s duration using the yield computed in the previous question.
(c) Suppose that the yield increases by 0.0004 over a week. Compute the new price of UKGB10YR and the actual change in bond prices. Using a duration based formula, predict the change in UKGB10YR’s price. How does this compared with the actual change?

Solutions

Expert Solution

Yield is calculated by using the formula of IRR and Duration has been calculated.

Actual price change is not only measured by the duration effect but aslo by taking into account convexity effect

Yield is 0.36%

Actual Result is as follows:

Duration in years is 8.47 years and the new price after accomodating the changes in the annual yield is 13,293.88

the formulaes used up in Duration is

PV of Weighted Cash flows/ Pv of Cash flows where the weights are the respective time periods.   

jeff jeffy answered 1 year ago
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