A 6%, semiannual coupon bond has a yield to maturity of 7.4% and a Macaulay duration of 5.7. The bond has a modified duration of ________ and will have a ________ percentage increase in price in response to a 25 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)). In this case, it's 5.7 / (1 + (0.074 / 2)) = 5.4966. The percentage increase in price for a 25 basis point (or 0.25%) decrease in yield is approximately the modified duration times the change in yield, which is 5.4966 * 0.0025 = 0.0137415 or 1.37%.

A 6%, Semiannual Coupon Bond Has a Yield to Maturity