Question
A $1,000 face value bond has a coupon of 5% (paid annually) and will mature 20 years from today? A. Assume that the yield-to-maturity is
A $1,000 face value bond has a coupon of 5% (paid annually) and will mature 20 years from today?
A. Assume that the yield-to-maturity is 6%. What is the bonds:
i. Duration
ii. Modified Duration
B. Assume that the bonds yield-to-maturity immediately changes from 6% to 6.1% (the bond still has 20 years to maturity).
i. Estimate the % change in the bonds price using
modified duration
ii. What is actual bond price (at YTM = 6.1%), and the % price change (from YTM = 6% to 6.1%)?
C. Assume that the bonds yield-to-maturity immediately changes from 6% to 7% (the bond still has 20 years to maturity).
i. Estimate the % change in the bonds price using modified
duration
ii. What is actual bond price (at YTM = 7%), and the % price
change (from YTM = 6%)?
D. Why is the estimated % price change closer in Part B than it is in Part C? Be precise!
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