In: Finance
An investor wants to find the duration of a(n) 30-year, 6% semiannual pay, noncallable bond that's currently priced in the market at $690.43, to yield 9%. Using a 200 basis point change in yield, find the effective duration of this bond.
a) The new price of the bond if the market interest rate decrease by 200 basis points (or 2%) is ___
(a)-The new price of the bond if the market interest rate decreased by 200 basis points (or 2%)
The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the face Value
Face Value of the bond = $1,000
Semi-annual Coupon Amount = $30 [$1,000 x 6% x ½]
Semi-annual Yield to Maturity = 3.50% [(9% - 2%) x ½]
Maturity Period = 60 Years [30 Years x 2]
The New Price of the Bond = Present Value of the Coupon Payments + Present Value of the face Value
= $30[PVIFA 3.50%, 60 Years] + $1,000[PVIF 3.50%, 60 Years]
= [$30 x 24.94473] + [$1,000 x 0.12693]
= $748.35 + $126.93
= $875.28
“Hence, the New Price of the Bond would be $875.28”
NOTE
-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)n} / r], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.
--The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)n], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.