(Please provide detail solution and show steps using the Business Calculator) Calculate the...

Question:

(Please provide detail solution and show steps using the Business Calculator) Calculate the duration of a bond with $1000 par value and a 7.5 percent coupon rate, 4 years until maturity, and a 9 percent yield to maturity? What is the expected change in price if interest rates were to rise by 4%?

Bond Duration:

A bond's duration is a measure of the bond's interest rate risk. The longer a bond's duration, the more volatile bond price is with respect to changes in interest rates.

Answer and Explanation:

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We can use the following formula to compute the Macaulay duration:

  • {eq}\displaystyle \frac{\sum_{t=1}^T{\frac{tC}{(1 + y)^t} + \frac{TF}{(1 +...

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Interest Rate Risk: Definition, Formula & Models

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Chapter 3 / Lesson 6
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Interest rate risk is really the risk of two different events (price reduction and reinvestment rate reduction) caused by a change in interest rates. Interest rate risk affects bond investments, but the good news for bond investors is that it can be mitigated or eliminated.


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