Question: A five-year bond with a yield of 7% (continuously compounded) pays a 5.5% coupon at the end of each year. What is the bonds price?

A five-year bond with a yield of 7% (continuously compounded) pays a 5.5% coupon at the end of each year.

  1. What is the bonds price?
  2. What is the bonds duration?
  3. Use the duration to calculate the effect on the bonds price of a 0.3% decrease in its yield.
  4. Recalculate the bonds price on the basis of a 6.7% per annum yield and verify that the result is in agreement with your answer to (c).

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