1. A 9%, semiannual coupon bond has a yield-to-maturity of 6.8% and a Macaulay duration of 3.4 years. The bond has a modified duration of ________ and will have a ________ increase in price for a 10 basis point decrease in the yield-to-maturity.

Question

Quizplus · Accepted Answer

Modified duration is calculated as Macaulay duration divided by (1 + (yield-to-maturity/number of coupon periods per year)). For a semiannual bond, this is 3.4 / (1 + (0.068/2)) = 3.2882 years. The price increase for a 10 basis point decrease in yield (0.1%) can be approximated by the modified duration times the change in yield, which is 3.2882 * 0.1% = 0.33%.

1 a 9%, Semiannual Coupon Bond Has a Yield-To-Maturity of 6.8