IBM has a 5-year, 4% coupon, annual interest bonds that are currently priced at $950 that have a face of $1000. Use these bonds for the questions below. 7. Calculate the Macaulay Duration and Modified Duration for this bond based on today’s price. Given your calculations estimate what would happen to the price of the bonds if interest rates were to decline 0.50% 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. 8. Calculate your annualized return if you assume that you buy the bonds today at the price given and that you sell the bond in 3 years when the YTM of the bond is at 3%. Assume that the interest you are paid is reinvested at an annual rate of 3%. Make sure you calculate your annualized return using the EAR formula. This is a 3-year return problem!! Comment on why your return is different than the YTM when you buy the bond today.

Answer rating: 100% (QA)

Macaulay Duration and Modified Duration Calculation Macaulay Duration is a measure of the sensitivity of the bonds price to changes in interest rates and it is calculated as the weighted average of th... View the full answer