Q11-4B

Expert-verifiedFound in: Page 360

Book edition
9th

Author(s)
Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus

Pages
748 pages

ISBN
9780078034695

**A bond currently sells for $1,050, which gives it a yield to maturity of 6%. Suppose that if the yield increases by 25 basis points, the price of the bond falls to $1,025. What is the duration of this bond?**

10.09 years.

Here ΔP = Change in price = -25

P = Initial price = $1,050

D = Duration of the bond

y = Yield to maturity

Δy = Δ (1 + y) /(1 + y) = Change in the Yield to maturity

The duration of the bond can be calculated using the formula- ΔP/P = -D*(Δy)

ΔP/P = -D*(Δy)

-25/1,050 = -D*(.25%)

-2.38% = -D*(.25%)

D* = 9.52

D = D*(1 + y)

D = 9.52(1.06) = 10.09 Years

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