Consider a 10.80 percent coupon bond with seven years to maturity and a current

Question

Consider a 10.80 percent coupon bond with seven years to maturity and a current price of $979.20. 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.)

          

1.

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

Explanation / Answer

1. Change in Price = - Duration x Change in yield x Price of the bond

= - 7 x 2% x 979.20 = - $137.09

New Price = 979.20 - 137.09 = $842.11

2.

First, we need to calculate the current yield. I/Y = RATE(7, 108, -979.2, 1000) = 11.24%

Now, the yield has increase 2% => new rate is 13.24%

Now, let's calculate PV(13.24%, 7, 108, 1000) = $892.69

PV -979.2 PMT 108 N 7 FV 1000 I/Y 11.24% rate 13.24% PV $892.69

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