23 Jul WHAT IS THE DURATION OF THIS BOND?
Please help me with part B. Can you show me how to get the first and the second answer using formula Show more Please help me with part B. Can you show me how to get the first and the second answer using formulas( modified duration and the capital gains formula)! Thank you A bond with 3 years remaining to maturity has an annual coupon rate of 8.5% and a face value of $1000. Assume the yield to maturity is 7.00% and answer the questions below. (You may use a financial calculator to get the PV of the bond in this problem but show your calculator entries i.e. 1000 FV etc). a) What is the duration of this bond? b) If interest rates fall 0.15% from the given YTM by what percent will the bond change in value? Show this 2 ways (using modified duration and the capital gains formula method). Answer to A and part of B A) Determination of the duration of the bond is as follows: Year Cash flow Discount factor@7% Discounted cash flows Weight Duration 1 85 0.934579439 79.44 0.076431 0.076431 2 85 0.873438728 74.24 0.07143 0.142861 3 85 0.816297877 69.39 0.066757 0.200272 3 1000 0.816297877 816.30 0.785382 2.356145 1039.36 2.775708 Thus the duration of the bond is 2.77 years. B) Computation of the % of fall in bond price if interest rate falls to 8.35%: Under modified duration method: If the interest falls by 0.15% the price of the bond comes to 1035; which represents in 0.38% decrease of the price of the bond. Comment Show less
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