A 4-year bond with a 3.5% (annual) coupon is at par. Calculate its duration.

2.    Increase the coupon to 5%. Recalculate duration.

3.    Back to the original 3.5% coupon. But lengthen maturity to 5 years and recalculate.

4.    Calculate the duration of the original bond if its yield-to-maturity increases to 4.5%.

5.    Back to the original par case. What is duration if it pays semi-annually?

6.    What if it pays annually, but amortizes 50% at the end of year 3?

7.    What is the Modified Duration of the original bond?

8.    What is its dv01?

9.    Using the dv01, how much will the bond's price change if its yield moves by 25 basis points in either direction?

10. Again using dv01, how much must the yield change in order to cause a price change of 1 (out of 100)?

How about a price change of 1/32 (1 thirty-second of a point, or dollar)?

11. Assume a 2% increase in the bond's yield. Calculate the new price using its dvo1 (or, equivalently, its duration). Now calculate the new price using the fundamental bond price formula. Why are the two answers not exactly the same?

Answer rating: 100% (QA)

Answer To calculate the duration of the bond in each scenario well use the following formula Duration C t 1 y n t 1 yn Where C Coupon payment annual t Time until payment in years y Yieldtomaturity in ... View the full answer