Question

Calculate the approximate modified duration for a 10 -year, 5% annual-pay bond priced at 106.84307 percent of par for a 5 basis point change in the yield to maturity.

a) 7.981
b) 7.853
c) 7.602

Answer 1

To calculate the approximate modified duration, you can follow these steps: 1. Calculate the bond's present value. 2. Calculate the bond's future cash flows. 3. Calculate the bond's Macaulay duration. 4. Calculate the modified duration.

Step-by-step explanation:

Modified duration is a measure of the sensitivity of a bond's price to changes in interest rates. It helps investors understand how much a bond's price will change for a given change in yield to maturity. To calculate the approximate modified duration, you can follow these steps:

1. Calculate the bond's present value by multiplying the bond's yield by its price.
2. Calculate the bond's future cash flows by multiplying the bond's yield by its price and adding the coupon payments.
3. Calculate the bond's Macaulay duration by dividing the sum of the present value of each cash flow by the bond's price.
4. Calculate the modified duration by dividing the Macaulay duration by (1 + yield).