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Q11-4B

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Essentials Of Investments
Found in: Page 360
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

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.

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Step by Step Solution

Given information

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)

Calculation of duration of the bond

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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