Question

A bond has 2 year to maturity, 6% coupon, 8% yield and pays annually. The current price of the bond is $964.3347. If yield increases by 25 basis points, calculate the new bond price using the duration model.

O 958.13
O 970.53
O 955.67
O 960.00
O None of the above

Answer 1

To calculate the new bond price using the duration model, multiply the current bond price by (1 + Change in Yield). With a change in yield of 25 basis points, the new bond price would be approximately $958.13.

Step-by-step explanation:

Common bond valuation methods include the discounted cash flow (DCF) method, yield to maturity (YTM) method, credit spread analysis, bond benchmarking, and option-adjusted spread (OAS) method.

Bond Valuation is the method of calculating and estimating the present value of future interest payments to estimate total bond yields at maturity. The valuation considers the market interest rate or discounted cash flow rate to value the bond yields accurately for an investor.

To calculate the new bond price using the duration model, we need to understand the relationship between bond prices and yields. When yields increase, bond prices decrease, and vice versa. The duration model helps us measure the sensitivity of bond prices to changes in yields. The formula to calculate the new bond price is:

Modified Bond Price = Current Bond Price * (1 + Change in Yield)

Using this formula, with a change in yield of 25 basis points (0.25%), the current bond price of $964.3347, and an annual coupon of 6%, the new bond price would be approximately $958.13.