Consider a 4.6 percent coupon bond with five years to maturity and a current pri

Question

Consider a 4.6 percent coupon bond with five years to maturity and a current price of $1,046.10. Suppose the yield on the bond suddenly increases by 2 percent.

Use duration to estimate the new price of the bond. (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Calculate the new bond price. (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Consider a 4.6 percent coupon bond with five years to maturity and a current price of $1,046.10. Suppose the yield on the bond suddenly increases by 2 percent.

Explanation / Answer

current yield of the bond

1046.1=46*PVAF(k,5)+1000*PVF(k,5)

k=3.58

Duration of the bond

D=c/k*PVAF(k,n)*(1+k)+(1-c/k)n

=(.046/.0358)*4.50*1.0358+(1-(.046/.0358)5

=4.565

modified duration is- 4.564/1.0358

-4.40

If yield is change by 2% than price will be change by 4.40*2=8.80%

so the price will be 1046.1-8.8%of 1046.1

(a) price =954.04

(b) price=46*PVAF(5.58%,5)+1000*PVF(5.58,5)

46*4.260+1000*.762

=957.96

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