Question

A bond currently sells for $1,170, which gives it a yield to maturity of 5%. Suppose that if the yield increases by 30 basis points, the price of the bond falls to $1,140. What is the duration of this bond

Answer 1

The duration of a bond measures its sensitivity to changes in interest rates.

Step-by-step explanation:

The duration of a bond measures its sensitivity to changes in interest rates. It indicates how much the bond's price will change for a given change in yield. The duration can be calculated using the formula:

Duration = (P+ - P-)/(2 x P x Δy)

Where P+ is the price of the bond when the yield decreases, P- is the price of the bond when the yield increases, P is the current price of the bond, and Δy is the change in yield.

Answer 2

8.53 years

Step-by-step explanation:

Calculation for the duration of the bond

The first step is to calculate for Change in Bond Price

Change in Bond Price = -(30)/1,170

Change in Bond Price = -0.0256×100

Change in Bond Price =-2.56%

Second step is to find the Effective Duration

Effective duration = -0.0256/0.0030

Effective Duration = 8.53 years

Therefore the duration of this bond will be 8.53 years