Question
Consider a 6% coupon 20-year option-free bond selling at 89.32. If the yield is decreased by 20 basis points from 7.0% to 6.8%, the price
Consider a 6% coupon 20-year option-free bond selling at 89.32. If the yield is decreased by 20 basis points from 7.0% to 6.8%, the price would increase to 91.32. If the yield increases by 20 basis points, the price would decrease to 87.38. Given this information, answer the following questions. (10 points)
a. what is the duration of this bond?
b. What is the approximate percentage price change if interest rates increase by 300 basis points?
c. How good is the approximation in (b) compared to the actual price change? Is it too high, too low or about right?
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