Question

*Compute the Price Percentage Change of Bond Z based on the following set of information (Part 1): --Bond Z is a fixed-income instrument with a duration of 6.25 years. The current level of interest rates is yielding 5% but is expected to decline by 25 basis points.

Answer 1

hond Duration = 6.25 years. Price pekooritags ok bont change of bond. • Informacion given Ti basis point = 0.01947 yield = 5% Percentage change in yield = 0.25%. (25 basis populit). To Calculate percentage change in yield, Calculator Modified duration og Modified dumation - Duration where lyam = yield to Matility. / • Modified duhalion of the bord . . . . . . . Modified duration = 6.25 -5.95 1.05 . . PY . . Percentage change in price of the bond. = Modified duration of the bond) x AyTM - (5.95 €(025) . . - +1048 . .

for as basis point decline, the bond price increases by 1. O Duration of the bond . - Duration of the bond Cap Tulos interest rate sensitivity, with • respect to bond-price. • We know thats bond-pruce is invessely propotional do Yah yield-to-Maturity -- We need to know how bond price change it a tomar • - yield changes during the Zenure of the bond. Dulation helps to the bond- portfolio managers to understand bond-price volability. • - Duration of a bond is calculated as. V tcnM Duration to try the P. (- Coupon paid by the issuck. t - Lime period, when investor receives the Coupon. M - Principal amount of the bond, received at makulity y yield of the bondo P - Price of the bond. n No. of maturity periods. City & Ctydn.

. . Bond-portfolio managers and in the prefer to calculate - Modified duration of the bond. - Modified duration - Duration of the bond Clt yield to maturity - Pelicon tage change in bond- price is calculated using roolifido duration. Percentage Change Mbond-price =-Modified duration) x 2YTM Dulation of bond- portfolio Duration of bond-port tolio Bs calculated as . Portfolio duration - Wi Di wi Weight of the bond. -> I apturos precontage of funds alloratied to the bond. . in the portfolio. Di - Duration of individual bond.

Contribution to portfolio duration. - It is calculated as product of weight of issue and duration of the issue. It is calculated for individual bond. Contribution = widi Contribution to portfolio duration, gives interest rate • Coposure of a particular issue to the bond por in the bond portfolio Portfolio managers can use modified-dulation to calculate protocost vrate exposulye of the bonds on the portfolio. Limitation. Duration and bond-modified dauration can be used to calculate changes in price of bond for small pekeenhage change in yöeldo •