Question: A five-year bond with a yield of 10% (continuously compounded) pays a 7% coupon at the end of each year. What is the bonds price?

A five-year bond with a yield of 10% (continuously compounded) pays a 7% coupon at the end of each year.

What is the bonds price?

What is the bonds duration?

Use the duration to calculate the effect on the bonds price of a 0.2% decrease in its yield.

Recalculate the bonds price on the basis of a 9.8% per annum yield and verify that the result is in agreement with your answer to (c).

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