A bond pays annual interest. Its coupon rate is 9%. Its value at maturity is $1,000. It matures in four years. Its yield to maturity is currently 6%.
-The modified duration of this bond is ______ years.

Question

Quizplus · Accepted Answer

Using the formula for modified duration: 
Modified Duration = (PV-) - (PV+)/ (2 x PV x ∆y)
Where PV- = bond price for yield minus 1% = $1,040.63
PV+ = bond price for yield plus 1% = $960.63
PV = current bond price = $951.39
∆y = change in yield = 0.01
Plugging in the values will give us:
Modified Duration = ($1,040.63 - $960.63)/ (2 x $951.39 x 0.01) = 3.36
Therefore, the modified duration of the bond is 3.36 years.

A Bond Pays Annual Interest