Assume today is November 1, 2020 and that all bonds pay interest semi-annually with a face value
Question:
Assume today is November 1, 2020 and that all bonds pay interest semi-annually with a face value of $1,000. YTM = Current yield + Capital Gains yield; CY = Annual Interest/Current Price
ABC is A rated; AA Treasuries yield 3-year is 1.90%, 10-year 2.10%
5 Years ago, ABC issued 6% coupon paying bonds with a face value set to mature on November 1, 2030. Growth concerns have forced monetary authorities throughout the world to lower interest rates during the past several years and as such, the price of these ABC bonds has risen to 1175.00
Calculate the Macaulay Duration and Modified Duration for these bonds based on today’s price. Given your calculations estimate what would happen to the price of the bonds if interest rates were to rise 1% from current (today’s levels). Assume the change is immediate and dissect the change in price due to duration and compare it to the actual calculated change in price. Why do you think the calculations are different?
Modified duration = Macaulay Duration / (1+YTM)
Financial Markets And Institutions
ISBN: 978-0132136839
7th Edition
Authors: Frederic S. Mishkin, Stanley G. Eakins