Steel Pier Company has issued bonds that pay semiannually with the following characteristics:
-If the yield to maturity decreases to 8.045% the expected percentage change in the price of the bond using Macauley's duration would be ____,while the expected percentage change in the price of the bond using modified duration would be ____.

Question

Steel Pier Company has issued bonds that pay semiannually with the following characteristics: 
-If the yield to maturity decreases to 8.045% the expected percentage change in the price of the bond using Macauley's duration would be ____,while the expected percentage change in the price of the bond using modified duration would be ____.

Quizplus · Accepted Answer

Macauley's duration is a measure of the weighted average time until the bond's cash flows are received. Modified duration is a measure of the percentage change in the bond's price for a given change in yield to maturity.The expected percentage change in the price of the bond using Macauley's duration is calculated as follows:Expected percentage change in price = -Macauley's duration * Change in yield to maturityThe expected percentage change in the price of the bond using modified duration is calculated as follows:Expected percentage change in price = -Modified duration * Change in yield to maturityIn this case, the yield to maturity decreases from 8.5% to 8.045%. The Macauley's duration is 12 years and the modified duration is 11 years. Therefore, the expected percentage change in the price of the bond using Macauley's duration is -12% * (8.5% - 8.045%) = 12%, and the expected percentage change in the price of the bond using modified duration is -11% * (8.5% - 8.045%) = 11%.

Steel Pier Company Has Issued Bonds That Pay Semiannually with the Following