Question

Calculate the modified duration for a 10-year, 12 percent coupon rate, and semi-annual coupon payment bond with a yield to maturity of 10 percent and a Macaulay duration of 7.2 years.

Answer 1

Missing question "If the interest rates increase by 50 basis points, What will be the percent change in price for the bond? Why? "

Modified Duration = Macaulay Duration / (1 + YTM)

Modified Duration = 7.2 / (1 + 10%)

Modified Duration = 7.2 / (1 + 10%)

Modified Duration = 6.55

% Change in Bond Price = - Modified Duration x Change in int rates

% Change in Bond Price = - 6.55 x 0.5%

% Change in Bond Price = - 3.27%

Thus, the Interest rates and bond prices are inversely related. Hence, increase in interest rates would lead to decline in bond prices.