A2 9 c 9. Answer the following questions on bond valuation and duration. c. Duration is a measure of interest rate risk. Specifically, it measures the approximate percentage change in bond price given...

A2 9 c

9. Answer the following questions on bond valuation and duration.

c. Duration is a measure of interest rate risk. Specifically, it measures the approximate percentage change in bond price given a small percentage change in interest rate (% bond price change / % interest rate change). For example, for a bond with a duration of five years, a 0.1% change in interest rate would change the bond’s price by 5 * 0.1% = 0.5%, approximately.

Suppose that the interest rates on all bonds increase uniformly by 0.1% (this is what is commonly called a “parallel upward shift in yields of 10 basis points”). What is the percentage change in the price on the coupon bond in part (b)? What is the approximate coupon bond price? Note that bond yield and bond price are inversely related to each other (i.e., an increase in yield should lead to a decrease in bond price).