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Tropical Dreams bonds have a duration of 6.8 years and a modified duration of 6.50. If...

Tropical Dreams bonds have a duration of 6.8 years and a modified duration of 6.50. If the yield is expected to decrease by 0.1%, what is the expected percentage change in the price of the bonds issued by Tropical Dreams? The yield to maturity is 9% and the bonds mature in ten years. The bonds carry a 9% coupon, paid semiannually. The par value is $1,000.

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Answer #1

As the yield and coupon rate are same, the bond will trade at par value, i.e., $1,000.

% change in bond price = -duration * Change in yield

= -6.50 * (-0.001) = 0.0065, or 0.65%

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