You ran a regression of the yield of KC Company’s 10- year bond on the 10- year U. S. Treasury benchmark’s yield using month- end data for the past year. You found the following result:
YieldKC = .54 + 1.22 3 YieldTreasury
where YieldKC is the yield on the KC bond and YieldTreasury is the yield on the U. S. Treasury bond. The modified duration on the 10- year U. S. Treasury is 7.0 years, and modified duration on the KC bond is 6.93 years.
a. Calculate the percentage change in the price of the 10- year U. S. Treasury, assuming a 50- basis-point change in the yield on the 10- year U. S. Treasury.
b. Calculate the percentage change in the price of the KC bond, using the regression equation above, assuming a 50- basis- point change in the yield on the 10- year U. S. Treasury.