Additional Exam 1 Practice

1) What is the duration of a par value bond with a coupon rate of 8% and a remaining time to maturity
of 5 years, assuming interest compounds annually?

Calculations are shown below.

2) What is the modified duration of a seven-year par value bond has a coupon rate of 9%?

3) Calculate the requested measures in the following questions for Bond A, assuming interest
is paid semiannually and a face value of $100.

Bond A
Coupon 8%
Yield to maturity 8%
Maturity (years) 2
Par $100.00
Price $100.00

a. What is the price value of a basis point for Bond A?

PMT = 4 I/Y = 8.0/2=4.00, N = 4, FV = 100, Compute PV =100
PMT = 4, I/Y = 8.01/2=4.005, N = 4, FV = 100, Compute PV = 99.98185266
PVBP = 100 - 99.98185266= $.01814734
 b. Compute the Macaulay duration for the bond.

1( 4) 2(4) 3(4) 4 (1 0 4)
+ + +
Macaulay duration (half years) = 1.04 1 1.042 1.04 3 1.04 4
100
377.509
¿ =3.77509
100

Macaulay duration (years) = Macaulay duration (half years) / 2 = 3.77509 / 2 = 1.8875.

c. Compute the modified duration for Bond A.
modified duration = Macaulay duration / (1 + y) = 1.8875 / 1.04 = 1.814948.
d. Calculate the convexity for Bond A.

convexity measure (half years) =

 2($4)  1  2($4)4 4(5)  100  $4 / 0.04 

 3
1  4
    1 
 (0.04)   1.04  (0.04) 2  1.04  1.04 6
5
  $100 
= 17.10934
convexity measure in m period per year
2
Convexity measure (years) = m = 17.10934 / 2(2) = 17.10934 / 4
= 4.277335

e. Calculate the actual price of a bond for a 100-basis point increase in interest rates.
FV = 100, PMT = 4, I/Y = 4.5, N = 4, Compute PV = -98.20623715

f. Using duration, estimate the price of the bond for a 100-basis point increase in
interest rates.
dP
P = (modified duration)(dy) = 1.814948 (0.01) = .01814948
 dP 
1   P
New price =  P  = (1 .01814948)*100 = $98.18505
g. Using both duration and convexity measures, estimate the price change of the bond
for a 100-basis point increase in interest rates.
dP 1
P = (modified duration)(dy) + 2 convexity measure (dy)2

1
= 1.814948 (0.01) + 4.277335 (.01)2 = .01794
2