Exercise 1B - Bond pricing - Refer to Dr Vassilios' topic 2 ppt slides

Example

Maturity years

Zero rate (% cont. comp)

0.5

5.0

1.0

5.8

1.5

6.4

2.0

6.8

Bond pricing

To calculate the cash price of a bond we discount each cash flow at the appropriate zero rate

In our example, the theoretical price of a two-year bond providing a 6% coupon semiannually is

What is the bond's duration?

What is bond price if there is a 0.4% decrease in its yield?

Bond price change =