A seven year 7.50% bond with semi-annual interest yielding 8% has 5 years remaining for Maturity. Ma

A seven year 7.50% bond with semi-annual interest yielding 8% has 5 years remaining for Maturity. Macaulay's duration of the bond is 3.9 year. What is the approximate change in price if market yield goes down to 7.90% a. Price increases by 0.39% b. Price increases by 0.375% c. Price increases by 0.406% d. Price decreases by 0.39% Ans - b Solution Modified Duration=(Macaulay's Duration)/(1+y/n) =3.9/1.04 =3.75 Difference in yield % =(8.00-7.90) =0.10 approximate change in price if market yield goes down = Macaulay Duration difference in yields =3.75*0.10 = =0.375 The yield goes down the bond price goes up by 0.375

 

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