A bond currently sells for $1,060, which gives it a yield to maturity of 5%. Sup

Question

A bond currently sells for $1,060, which gives it a yield to maturity of 5%. Suppose that if the yield increases by 50 basis points, the price of the bond falls to $1,035. What is the duration of this bond? (Do not round intermediate calculations. Round your answer to 4 decimal places.

Duration: ?

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A bond currently sells for $1,060, which gives it a yield to maturity of 5%. Suppose that if the yield increases by 50 basis points, the price of the bond falls to $1,035. What is the duration of this bond? (Do not round intermediate calculations. Round your answer to 4 decimal places.

Explanation / Answer

The duration is given by the formula Pa-Pb/2(P0)(change in int.rates)

where Pa is the price when the interest rate is incremented = 1010

Where Pb is the price when the interes rate is decremented = 1110

Current bond price = P0 = 1060

Change in interest rates is 0.50% = 0.0050

hence Duration is (1010-1110) / (2*1060*0.0050) = 9.4340 years.

Hence duration is 9.4340 years

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