9. Duration is an important measure of interest rate risk. The duration is the percent the price of a bondchanges for each percent change in the yield to maturity. For example, a bond with a price of $900 has aduration of 4 will have a price change of $36 for every 1% change in the bond yield to maturity (1% x 44%, then take 4% x $900 $36.) If the rate change is up, the bond price goes down -$36. Ifthe ratemoves down, the price of the bond goes up $36.Assume the same $900 bond has an interest rate change from 7% to 5%, what would be the new priceof the bond?Assume another bond is priced at $1,100 has an interest rate change from 7% to 10%, what would bethe new price of the bond?

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Asked Oct 16, 2019
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9. Duration is an important measure of interest rate risk. The duration is the percent the price of a bond
changes for each percent change in the yield to maturity. For example, a bond with a price of $900 has a
duration of 4 will have a price change of $36 for every 1% change in the bond yield to maturity (1% x 4
4%, then take 4% x $900 $36.) If the rate change is up, the bond price goes down -$36. Ifthe rate
moves down, the price of the bond goes up $36.
Assume the same $900 bond has an interest rate change from 7% to 5%, what would be the new price
of the bond?
Assume another bond is priced at $1,100 has an interest rate change from 7% to 10%, what would be
the new price of the bond?
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9. Duration is an important measure of interest rate risk. The duration is the percent the price of a bond changes for each percent change in the yield to maturity. For example, a bond with a price of $900 has a duration of 4 will have a price change of $36 for every 1% change in the bond yield to maturity (1% x 4 4%, then take 4% x $900 $36.) If the rate change is up, the bond price goes down -$36. Ifthe rate moves down, the price of the bond goes up $36. Assume the same $900 bond has an interest rate change from 7% to 5%, what would be the new price of the bond? Assume another bond is priced at $1,100 has an interest rate change from 7% to 10%, what would be the new price of the bond?

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Expert Answer

Step 1

As per the given information, the percentage change in the bond\'s yield to maturity is 2% (7% - 5%) which is decreased from 7% to 5%. Hence, the new price of the bond is as follows:

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New price of the bond Old price -(Duration xrate changex Old price) $900-(4x2%x$900) -$900-$72 =$828

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Step 2

Therefore, the new price of the bond is $828.

Step 3

As per the given information, the percentage change in the bond's yield to maturity is 3% (10% ...

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New price of the bond Old price +(Duration xrate change x Old price) =$1,100+(4x3%x$1, 100) =$1,100+$132 $1,232

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