Question: Consider two bonds: Bond A is a 5year bond. Bond B is a 10year bond. Both bonds have a face value of $1 , 000

Consider two bonds: Bond A is a 5year bond. Bond B is a 10year bond. Both bonds have a face value of $1,000 and coupon of 8% per annum paid semiannually. Both bonds have a YTM of 8% per annum. Both bonds trade at par.

1) Now assume that the YTM of both the bonds changes to 10% per annum. Determine which bond experiences a smaller percentage increase/decrease in price.

2) Consider Bond A when coupon rate is 8% per annum paid semiannually and the yield is 10% per annum. Assume a 25 basis point increase in the annual yield. Determine the central difference approximation for the duration.

3) Compare your calculated duration in the previous case with the value using Excel.

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