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An annual coupon bond has a coupon rate of 10% and matures in two years. The current bond yield is 8%, the face value for
An annual coupon bond has a coupon rate of 10% and matures in two years. The current bond yield is 8%, the face value for the bond is $1000.
Answer the following questions (5 marks):
- Calculate the Macaulay duration of the bond (2 marks)
- Using the duration approach, calculate the percentage of change in bond price when the bond yield increases by 2% (2 marks).
- Discuss the limitations of the duration approach in modelling the interest rate sensitivity of a bond (1 mark).
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