The duration of a ten-year, 10 percent coupon bond when the interest rate is 10 percent is 6.76 years. What happens to the price

Question

zlopas [31]

3 years ago

9

The duration of a ten-year, 10 percent coupon bond when the interest rate is 10 percent is 6.76 years. What happens to the price

of the bond if the interest rate falls to 8 percent?

Chemistry

1 answer:

yawa3891 [41] · Answer 1 · 2022-03-24T18:22:07+03:00

Answer:

%DP=12.3% increment

Explanation:

The duration of a ten-year, 10 percent coupon bond when the interest rate is 10 percent is 6.76 years. What happens to the price of the bond if the interest rate falls to 8 percent?

We go by the formula.

As the calculation in tables(on the internet), the duration of a ten-year 10% coupon bond is 6.76 years.

$%DP=-6.76*\frac{di}{1+i}$ ......................................................................1

duration=6.76

di=change in interest=0.08-0.1

i=initial interest rate, 10%

Juxtaposing the parameters into the given equation

-6.76*(-0.18)/1.1

%DP=12.29

%DP=12.3% in approximation