Consider a 2-year, risk-free bond with a coupon rate of 6% (annual coupons) and a face value of $1,000. If the yield on the above bond is 6%: a. What is the Macaulay duration of this bond? b. If the yield increases to 7% immediately, what does the duration approximation predict will be the percentage change in the bond price? c. If the yield decreases to 5% instead, what is the approximate percentage change in the bond price implied by the bond’s duration? d. After receiving the first coupon payment in year 1, the yield increases to 7% and you decide to sell the bond. What is your annualized HPR?
Question A
.Consider a 2-year, risk-free bond with a coupon rate of 6% (annual coupons) and a face value of $1,000. If the yield on the above bond is 6%:
a. What is the Macaulay duration of this bond?
b. If the yield increases to 7% immediately, what does the duration
approximation predict will be the percentage change in the
c. If the yield decreases to 5% instead, what is the approximate
percentage change in the bond price implied by the bond’s duration?
d. After receiving the first coupon payment in year 1, the yield increases to
7% and you decide to sell the bond. What is your annualized HPR?
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