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You are holding a 2-year 10% (annualized) coupon bond with face value $1,000 now. The interest...

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Finance

You are holding a 2-year 10% (annualized) coupon bond with facevalue $1,000 now. The interest rate now is 5% (semi-annual).However, the interest rate increases to 5.5% (semiannual) tomorrow.What is the Macaulay Duration now? What is the Modified Durationnow? When the interest rate (semi-annual) increases to 5.5%tomorrow, what is the actual price change in this bond? And what isthe bond price change using modified duration approximation? Whichone is larger in absolute value?

******* Need answer not in excel form *********

Answer & Explanation Solved by verified expert
4.0 Ratings (711 Votes)
1 Macaulay Duration Macaulay Duration is calculated as the present value of the cash flows of the bond times weights by lenght of tiem of such cash flows divided by the current market price of the bond The cash flows for the coupon bond is 100 for each of the 2 years 10 of 1000 and 1000 at end of 2nd year as maturity Hence the cash inflows for the bond is as follows    See Answer
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You are holding a 2-year 10% (annualized) coupon bond with facevalue $1,000 now. The interest rate now is 5% (semi-annual).However, the interest rate increases to 5.5% (semiannual) tomorrow.What is the Macaulay Duration now? What is the Modified Durationnow? When the interest rate (semi-annual) increases to 5.5%tomorrow, what is the actual price change in this bond? And what isthe bond price change using modified duration approximation? Whichone is larger in absolute value?******* Need answer not in excel form *********

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