1. We have a bond with a coupon rate of 10% paid annually, 3 years to...
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1. We have a bond with a coupon rate of 10% paid annually, 3 years to maturity, a par value of $1,000, and the yield to maturity of 8%. 1) Figure out the duration of the bond. (40points) 2) You believe that the Fed is about to decrease interest rates by 30 basis points (0.3%). Figure out the percentage change in the bond price and the direction (increase/decrease) of the price change using the duration. (If you cannot figure out the duration, use a duration of 3.) (30points) 1. We have a bond with a coupon rate of 10% paid annually, 3 years to maturity, a par value of $1,000, and the yield to maturity of 8%. 1) Figure out the duration of the bond. (40points) 2) You believe that the Fed is about to decrease interest rates by 30 basis points (0.3%). Figure out the percentage change in the bond price and the direction (increase/decrease) of the price change using the duration. (If you cannot figure out the duration, use a duration of 3.) (30points)
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SOLUTION To calculate the duration of a bond we need to consider the time to maturity coupon rate yield to maturity and par value Lets calculate the duration and then determine the percentage change i... View the full answer
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