You are considering buying a 30-year U. S. Treasury bond but are nervous about the effect on bond price if the yield to maturity on the bond increases. The bond has a 3% coupon rate and pays coupons semi-annually. The duration is 18 years. Suppose that interest rates on this bond rise by 1.8%. Calculate the corresponding percentage change in the price of the bond using the approximation method based on bond duration. Give your answer in percent to one decimal place. If the price decreases, then include a minus sign; if the price increases, do not include any sign. Do not type the % symbol.

Question

Briley Cuevas

Business

11 September, 03:14

You are considering buying a 30-year U. S. Treasury bond but are nervous about the effect on bond price if the yield to maturity on the bond increases. The bond has a 3% coupon rate and pays coupons semi-annually. The duration is 18 years. Suppose that interest rates on this bond rise by 1.8%. Calculate the corresponding percentage change in the price of the bond using the approximation method based on bond duration. Give your answer in percent to one decimal place. If the price decreases, then include a minus sign; if the price increases, do not include any sign. Do not type the % symbol.

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Cynthia Yoder · Answer 1

The corresponding percentage change in the price of the bond using the approximation method based on the bond duration is - 3.24%

Explanation:

In this question, we are to calculate the corresponding percentage change in the price of the bonds using the approximation method based on the bond duration.

Mathematically, approximate change in bond price = - (Duration * Change in yield)

From the question, we identify that the duration is 18 years while the change in yield is 1.8% = 1.8/100 = 0.18

We plug this in the equation above;

The approximate change in bond price is thus; - (18 * 0.18) = - 3.24%