A bank holds a 5-year par value bond of $5million. The duration of the bond is 4 years. The bond is currently priced at $5.1 million with a yield to maturity of 5 per cent. The bank intends to sell the bond in one months time, but the bank expects that interest rates may increase with 1 per cent before the bond will be sold. The bank would therefore like to hedge against the expected change in interest rates with an appropriate position in a forward contract. A one month forward contract agreement at a price of $5.1 million is still available to the bank.

By how much will the value of the bond change based on the expected interest rate change? (2 marks)

Show all your workings and specify whether it is an increase or decrease in value.