pon rate. The coupon bond is also currently trading at a 3% yield. (a) Please calculate the duration of each bond. Which bond has the lower duration? Provide some intuition for this result. (b) Using the formula that approximates bond price change as a function of its duration, please calculate the approximate price change of both bonds if yields increase from 3% to 4%

Essentials Of Investments
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Duration
1. A zero coupon bond with 3 years to maturity has an annualized yield to maturity of 3%. A 3-year maturity annual-pay coupon bond has a face value of $1000 and a 5% coupon rate. The coupon bond is also currently trading at a 3% yield.

(a) Please calculate the duration of each bond. Which bond has the lower duration? Provide some intuition for this result.

(b) Using the formula that approximates bond price change as a function of its duration, please calculate the approximate price change of both bonds if yields increase from 3% to 4%. 

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