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A bond currently has a price of $1,050. The yield on the bond is 6%. If the yield increases 25 basis points, the price of the bond will go down to $1,030. The duration of this bond is ____ years.
A. 7.46.
B. 8.08.
C. 9.02.
D. 10.11.

Respuesta :

hyderali230

Answer:

B. 8.08.

Explanation:

Use the following formula to calculate the duration of the bond

Change in Bond Price / Current Price = -Duration x Change in Yield on the bond

-Duration = ( Change in Bond Price / Current Price ) / Change in Yield on the bond

Where

Change in price of the bond = $1,030 - $1,050 = -$20

Current Price = $1,050

Change in Yield on the bond = 25 / 100 = 0.25%

Placing values in the formula

-Duration = ( -$20 / $1,050 ) / 0.25%

-Duration = -7.6

Duration = 7.6

Now use the following formula to calculate the yearly duration

Duration = Duration x ( 1 + Yield on the bond ) = 7.6 x ( 1 + 6.25% ) = 8.08

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