Use the duration to calculate the effect on the bonds price, Financial Management

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Use the duration to calculate the effect on the bonds price

A 3-year bond with a yield (YTM) of 6% (semi-annually compounded) pays a coupon of 4% semi-annually (2% each 6 months).

a. What is the bond price (in percent)?

b. What is the bond duration (in years)?

c. Use the duration to calculate the effect on the bond’s price of a 0.1% decrease in its yield

d. Recalculate the bond’s price on the basis of a 5.9% per annum yield (YTM) and verify that the result is in agreement with your answer to (c).

e. Why did we calculate duration as part of our derivatives course?

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