The duration of a ten-year, 10 percent coupon bond when the interest rate is 10 percent is 6.76 years. What happens to the price of the bond if the interest rate falls to 8 percent?

The duration of a ten-year, 10 percent coupon bond when the interest rate is 10 percent is 6.76 years. What happens to the price of the bond if the interest rate falls to 8 percent?

We go by the formula.

As the calculation in tables(on the internet), the duration of a ten-year 10% coupon bond is 6.76 years.

[tex]%DP=-6.76*\frac{di}{1+i}[/tex]......................................................................1

duration=6.76

di=change in interest=0.08-0.1

i=initial interest rate, 10%

Juxtaposing the parameters into the given equation

-6.76*(-0.18)/1.1

%DP=12.29

%DP=12.3% in approximation

okpalawalter8 okpalawalter8 · Answer 2 · 2022-04-01T11:31:03+02:00

The price of the bond if the interest rate falls to 8 percent is mathematically given as Dp=12.29%

What happens to the price of the bond if the interest rate falls to 8 percent?

Question Parameter(s):

The duration of a ten-year, 10 percent coupon bond when the interest rate is 10 percent is 6.76 years.

Generally, the equation for the Price change is mathematically given as

Dp=Duration*change in interest/initial interest rate

Thereofore

Dp=-6.76*(-0.18)/1.1

Dp=12.29

In conclusion,the price of the bond

Dp=12.29%