You have discovered that when the required rate of return on a bond you own fell

Question

You have discovered that when the required rate of return on a bond you own fell by 0.5 percent from 8.4 percent to 7.9 percent, the fair present value rose from $960 to $980. What is the duration of this bond? Assume annual payments. (Do not round intermediate calculations. Round your answer to 1 decimal place. (e.g., 32.1))

Duration of Bond in years answer

You have discovered that when the required rate of return on a bond you own fell by 0.5 percent from 8.4 percent to 7.9 percent, the fair present value rose from $960 to $980. What is the duration of this bond? Assume annual payments. (Do not round intermediate calculations. Round your answer to 1 decimal place. (e.g., 32.1))

Duration of Bond in years answer

Explanation / Answer

duration = -(1/price)*(change in price/change in rate)

duration = -(1/960)*((980-960)/0.5)*100

=-(1/960)*4000=-4.2

therefore with every 1basis points increase in interest rate , the value decreases by 4.2basis points

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