Final answer:
To determine YTM, you solve for the discount rate that equalizes the bond's current price with the present value of future cash flows. Duration measures the bond's price sensitivity to interest rate changes and is used alongside YTM for calculation. A decrease in interest rates can lead to an estimated price increase using the bond's duration and current price.
Step-by-step explanation:
To calculate the yield to maturity (YTM) of a bond, you need to solve for the interest rate that makes the present value of all future coupon payments and the repayment of the principal (the face value) equal to the current price of the bond. This can be computed using a financial calculator or specialized software, as it generally requires solving for the rate in the present value formula through iteration.
Duration is a measure of the sensitivity of a bond's price to changes in interest rates. To compute the duration, you would typically use the YTM calculated previously and apply it to the duration formula, which includes the present values of all cash flows weighted by the time they are received. This computation often requires financial calculation tools due to its complexity.
Finally, if interest rates are expected to decrease by 50 basis points (0.50%), the expected dollar and percentage change in the price of the bond can be estimated using duration. The change in price is roughly equal to the negative of the duration times the change in yield, while the percentage change is this dollar change divided by the current bond price.