Question

You are considering buying a 30-year U.S. Treasury bond but are nervous about the effect on bond price if the yield to maturity on the bond increases. The bond has a 3% coupon rate and pays coupons semi-annually. The duration is 19 years. Suppose that interest rates on this bond rise by 0.9%. Calculate the corresponding percentage change in the price of the bond using the approximation method based on bond duration.

Answer 1

The corresponding change in bond price = 17.1%

Explanation:

In this question, we are interested in calculating the percentage change in the bond price using the approximation method based on bond duration;

Mathematically;

% change in bond price = Duration * Change in yield

From the question;

Duration = 19 years

Change in yield = 0.9%

Thus;

% change in bond price = 19 * 0.9% = 17.1%