Dave buys a bond that bond pays annual coupons at an annual rate of 6% for 8 years. Its redemption and face values are both 10,000. (a) Calculate the Macaulay duration of this bond at a flat annual effective yield of 6%. (b) Use this to approximate the change in price of the bond if the yield curve were to undergo a parallel shift upward to 7% using the first-order Macaulay approximation. Make sure to indicate whether this is an increase or decrease in price.
Dave buys a bond that bond pays annual coupons at an annual rate of 6% for 8 years. Its redemption and face values are both 10,000. (a) Calculate the Macaulay duration of this bond at a flat annual effective yield of 6%. (b) Use this to approximate the change in price of the bond if the yield curve were to undergo a parallel shift upward to 7% using the first-order Macaulay approximation. Make sure to indicate whether this is an increase or decrease in price.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Dave buys a bond that bond pays annual
coupons at an annual rate of 6% for 8 years.
Its redemption and face values are both
10,000.
(a) Calculate the Macaulay duration of this
bond at a flat annual effective yield of 6%.
(b) Use this to approximate the change in
price of the bond if the yield curve were to
undergo a parallel shift upward to 7% using
the first-order Macaulay approximation. Make
sure to indicate whether this is an increase or
decrease in price.
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