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The current price of an annual coupon bond is 100. The derivative of the price of the bond with...

Question:

The current price of an annual coupon bond is 100. The derivative of the price of the bond with respect to the yield to maturity is -700. The yield to maturity is an annual effective rate of 8%.

Calculate the duration of the bond.

Bond Duration:

The duration of a bond is a measure of a bond's interest rate risk. Specifically, the duration indicates the change in bond price given a 100 basis points, or 1 percentage, change to the bond's yield to maturity.

Answer and Explanation:

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The duration of the bond is 7.56.

Let {eq}P {/eq} denote the bond price, and {eq}y{/eq} denote the bond's yield to maturity. Then the modified...

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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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