Answered

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A bond with a 9-year duration is worth $1,080, and its yield to maturity is 8%. If the yield to maturity falls to 7.84%, you would predict that the new value of the bond will be approximately:________

Sagot :

Answer:

$1,094.40

Explanation:

The computation of the new value of the bond is shown below:

The Change in YTM

= 8% - 7.84%

= 0.16%

As YTM of  the bond is reduced by 0.16%, so the price of the bond should be rise

Also the time period is 9 year.

Now Change in bond price

= - Duration × Change in yield × 100

= - 9 × (-0.16%) × 100

= 1.44%

And,

Change in Bond Price = $1,080 × (1.44%)

= 14.40

So, Price of bond increase by $14.40.

Now

New Price of bond = $1,080 + $14.40

= $1,094.40

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