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Solution Library
Calculation of Percentage Change in Bonds Price when Interest Rate Changes
Question
What are the duration and modified duration of a seven-year, 3.5 percent coupon rate, annual coupon payment, $1000 par value government note priced today to yield 3 percent to maturity (use the text formulas or Excel’s Duration and MDuration functions)? What is the convexity of this instrument? [Recall that Bonds and Bond Properties.xls illustrates these calculations.] Using one of the following approximation formulas with yield data in decimal form,
[if text formula] % Change in Price 100 (-1.0 Duration (YieldNew-YieldOld)/(1+YieldOld)),
[if Excel function] % Change in Price 100 (-1.0 MDuration (YieldNew-YieldOld)),
what is the approximate percentage change in this bond's price if yields on comparable securities rise to 4 percent? What is the actual percentage change in this bond's price if yields on comparable securities rise to 4percent (use a financial calculator or Excel’s PV function)?
Summary
This question belongs to finance and discusses about Macaulay duration and modified duration of bonds.
Total word count: 71
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