A corporate bond has 2 years to maturity, a coupon rate of 6%, a face value...

A corporate bond has 2 years to maturity, a coupon rate of 6%, a face value of $1,000 and pays coupons semiannually. The market interest rate for similar bonds is 7.5%.

What is the price of the bond (in $)?

What is the bond's duration in years?

If yields fall by 0.8 percentage points, what is the new expected bond price based on its duration (in $)?

What is the actual bond price after the change in yields (in $)?

What is the difference between the two new bond prices (in absolute $)?

Expert Solution

Duration measured in years, which says how long it will be before a bond’s purchase price repaid in present value money.

Modified Duration is a measure of volatility of Bond, In other words, modified duration is a measure of % change in bond price for every 1% change in market interest rate.

Please refer to below spreadsheet for calculation and answers. Cell reference also provided.

Formula reference -

Please note- figures are rounded up to 4 decimals.

Hope this will help, please do comment if you need any further explanation. Your feedback would be appreciated.

jeff jeffy answered 1 year ago

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