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Question

2% t , (! " : "2-,F-@ 100%1. 0 Search in Sheet Home Layout Tables Charts abc whap Text , General Merge C0 00Conditional Calculation Insert Delete Format Themes Aa 115 7 YTM 8 Macaulay Duration 9 Change in int rates 10 11 a) 12 b) 13 c) 14 d) 15 the formuals in the orange 7.2 6.43 years 6.35 years 6.79 years 6.86 years 7.01 ycars 17 Modified Duration 18 19 %Change in Bond Price 21 23 24 25 27 28 29 31 32 35 37 38 39 41 42 43 45 47 48 49 51 S2 53 Prob 2 Prob 3Prob 4 Prob Normal View Cakulate Sum-0

Explanation / Answer

Modified duration is a measure of volatilty. It is calculated as follows -

Modified duration = Duration / (1 + YTM) = 7.2 / (1 + 0.10) = 6.5454545454 or 6.545

Modified duration is a meaure of % change in bond price for every 1 % change in market interest rate. In our case, if market interest rate changes by 1%, bond price will change by 6.545%. So, if their is 0.50% change in interest rates, the bond price will change by 6.545% x 0.50 or, 3.273%.

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