Consider a 10.60 percent coupon bond with six years to maturity and a current pr

Question

Consider a 10.60 percent coupon bond with six years to maturity and a current price of $976.90. Suppose the yield on the bond suddenly increases by 2 percent.

         

Use duration to estimate the new price of the bond. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

         

            

Calculate the new bond price. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

          

Consider a 10.60 percent coupon bond with six years to maturity and a current price of $976.90. Suppose the yield on the bond suddenly increases by 2 percent.

Explanation / Answer

1)

We are given:

FV = $1000

N = 6

PV = 976.90

Coupon amount (PMT) =1000 x 10.60% = $106

First we need to calculate yield to maturity:

YTM = (106 + (1000-976.90)/6)/(1000+976.90)/2

YTM =(106 +3.85)/988.45

YTM =11.11%

Now we will calculate duration:

Duration of the bond = 4616.06/976.90 = 4.725

2)

change in yield (y) =2%

the change in bond price can be calculated using the following formula:

?P=-?y

t CF PVIF PVIF x CF x t 1 106 0.900 95.40 2 106 0.810 171.71 3 106 0.729 231.80 4 106 0.656 278.16 5 106 0.590 312.92 6 1106 0.531 3526.07 4616.06

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.