Question
a) What do the Macaulay Duration and Modified Duration tell us about a bond? (20 marks) (b) Calculate the Macaulay Duration of a 3-year government
a) What do the Macaulay Duration and Modified Duration tell us about a bond? (20 marks)
(b) Calculate the Macaulay Duration of a 3-year government bond that pays a 4% coupon annually, if it is priced at 80 per 100 nominal value and has a yield to maturity (YTM) of 12.38%. (20 marks)
(c) Calculate the Modified Duration of this bond. (10 marks)
(d) Using the Modified Duration, calculate the change in price of this bond if the yield rises by half of one percentage point. (20 marks)
(e) Now calculate the price of the bond, using the new yield from part (d), by calculating the present value of the bonds cash flows. (10 marks)
(f) Why do your answers to parts (d) and (e) differ?
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