A bond that pays interest semiannually has a 2.5 percent promised yield and a price of...
A bond that pays interest semiannually has a 2.5 percent promised yield and a price of $1,225. Annual interest rates are now projected to increase 50 basis points. The bond's duration is 10 years. What is the predicted new bond price after the interest rate change? (Watch your rounding.)
Homework Answers
Modified duration = Duration / ( 1 +YTM )
= 10 / ( 1 + 0.025)
= 10 / 1.025
= 9.76%
Thus 1% change in int rate affects the price by 9.76% in opposite direction.
Thus 0.5% inc in rate leads to [ 9.76% * 0.5] decrease in price.
Price change = 4.88%
New Price = Current price [ 1 - Price change % ]
= $ 1225 * [ 1 - 0.0488 ]
= $ 1225 * 0.9512
= $ 1165.22
Pls comment, if any further assistance is required.
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