Question

Steeler Company has issued bonds that pay semiannually with the following characteristics: Coupon Yield to Maturity Maturity Duration 10% 10% 10 years 6.76 years If the yield to maturity decreases to 8.045%, the expected percentage change in the price of the bond using modified duration would be ________.

Answer 1

the expected percentage change in the price of the bond using modified duration would be 12%

Step-by-step explanation:

A= Semi annually= 2

YM= Yield to Maturity= 10%

M= Maturity= 10%

MtD= Maturity duration= 6.76 years

Modified duration (MD)= MtD/1+YM/A

MD= 6.76/1+10%/2= 6.76/1.05= 6.438 approx 6.44 years

Change in Yield to maturity = 8.045%- 10%= -1.955%

Change in percentage Price= -Modified duration*Change in Yield to maturity

Change in percentage Price= -6.44*(--1.955%

)= 12.59%