Question
A 3-year maturity bond has a coupon rate of 7% and a yield to maturity (YTM) of 8%. The bond pays annual coupons and has
A 3-year maturity bond has a coupon rate of 7% and a yield to maturity (YTM) of 8%. The bond pays annual coupons and has a face value of $1,000.
a) Calculate the duration of the bond. Please show all of your work in a table format.
b) If the yield to maturity (YTM) immediately rises to 11%, compute the predicted (dollar) change in the bond price using the duration approximation rule.
c) For large changes in yields (or interest rates), the predicted change in the bond price (obtained via the duration approximation rule) is likely to be different from the actual change in the bond price. Why? Explain.
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