A five-year bond with a yield of 7% (continuously compounded) pays an 8% coupon at the end

Question:

A five-year bond with a yield of 7% (continuously compounded) pays an 8% coupon at the end of each year.

a) What is the bond's price?

b) What is the bond's duration?

c) Use the duration to calculate the effect on the bond's price of a 0.2% decrease in its yield.

d) Recalculate the bond's price on the basis of a 6.8% per annum yield and verify that the result is in agreement with your answer to (c).

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...