A bond with 15 years to maturity, 9% coupon that pays annually is trading at an 11% yield to maturity and has a Macaulay duration of 8.29 years.

Q1. If the YTM increases by 100 basis points (i.e. 1% from the original 11% to a new YTM of 12%), what would be the estimated (or expected) percent change in price of this bond based on its duration? What would the estimated percent change in price be if the YTM decreases by 100 basis points (i.e. 1% from the original 11% to a new YTM of 10%)?

Q2. What is the actual percent change in price if the YTM increases by 100 basis points? What is the actual percent change in price if the YTM decreases by 100 basis points? (hint: use the financial calculator to calculate the beginning price and the new price based on the YTM.)

Q3. Please plot the estimated and actual prices and their associated yields on a graph where the Y-axis is the bond price and the X-axis is the bond yield to maturity.

Q4. From your reading about bond duration and interest rate risk, what explanation can you find for the difference between the estimated and actual percent changes?

Answer rating: 100% (QA)

Q1 The estimated percent change in price of the bond based on its duration can be calculated using the following formula change in price duration x change in yield Where duration is 829 years and the ... View the full answer