Question

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?

Answer 1

The duration of the bond is approximately 9.52 years. Duration measures the sensitivity of a bond's price to interest rate changes, and it helps investors manage interest rate risk.

Step-by-step explanation:

Finding the Duration of a Bond

The question asks to calculate the duration of a bond given its price changes with respect to a change in yield to maturity. Here, duration measures the sensitivity of a bond's price to interest rate changes and can be estimated using the following formula:

Duration = -(Price Change / (Initial Bond Price * Change in Yield))

To calculate the duration:

• 
  
• 
  
• 
  

Plug in these values to the formula:

Duration = -($25 / ($1,050 * 0.0025))

Duration = -($25 / $2.625)

Duration = -9.52 (approximately)

Therefore, the bond's duration is approximately 9.52 years. This indicates how long it takes for the price of the bond to be 'paid back' by its cash flows, accounting for the time value of money. The concept of bond duration is vital for investors to manage interest rate risk.

Answer 2

Step 1 of 3

Duration of a bond refers to the time period till the end of which investor can recover his investment in bond. For normally traded bonds, duration is always less than its maturity, whereas for Zero-Coupon bond duration is equal to its maturity.

Duration  of a bond can be calculated using the following formula:



Here,

“” is the change in price.

“” is the initial price.

“” is the yield to maturity.

“” is the change in yield.

“” is the duration of a bond.