Question

A bond currently has a price of $1,050. The yield on the bond is 7%. If the yield increases 28 basis points, the price of the bond will go down to $1,027. The duration of this bond is ____ years.

Answer 1

Answer:

7.82 years

Explanation:

Solution

Recall that:

The price of a bond is currently at = 1050

The yield on the bond = 7%

If the yield increases in 28 point basis, the bond price reduces to = $1027

Now,

We find out the bond duration

Thus,

The change in Price/Initial Price = - Duration * Yield change

=$1050 -$1027 = -23

-23/1050 = - Duration * 0.28%

So,

The duration = 23/(1050*0.28%) = 7.82

The bond duration is 7.82 years