Example:Calculate the price of a 20 year, 9 ½ % bond that is being priced to yield 10%. The par value is assumed to be $1,000. Before any calculation, what is the price of this bond in relation to the par value? How do we know(hint: if the yield-to-maturity > discount rat...
It is for this reason that bond duration eliminates the impact of different cash flow patterns during the calculation stage. The end result is a number that can be used for comparison across different types of bonds.The value of the duration number is fairly simple to interpret. The higher ...
Let's use the same example and compute convexity: Par Value: $1000 Coupon: 5% Current Trading Price: $960.27 Yield to Maturity: 6.5% Years to Maturity: 3 Coupon Payouts: One a Year Duration, Modified Duration: 2.856, 2.682 (Note: this calculation is in the bond duration article)...
Add each coupon's duration to calculate the bond's duration. The example bond's duration would be 1.9194, which means it would take 1.9194 years to recover the bond's true cost. Determine the bond’s coupon rate and coupon dollars. The coupon rate is the stated rate of interest on the...
Example Bond Price Calculation Suppose you want to calculate the current price of a $1,000, 7 percent semi-annual bond that has nine years left until maturity. The coupon rate tells you that bond interest of $35 is paid semi-annually. The bond last paid interest 54 days ago. Currently,...
Find Bond Duration Given Yield This example shows how to compute the duration of a bond at three different yield values. Yield = [0.04; 0.055; 0.06]; CouponRate = 0.055; Settle = datetime(1999,8,2); Maturity = datetime(2004,6,15); Period = 2; Basis = 0; [ModDuration,YearDuration,...
The calculation of Bond Duration brings all these factors together in one number, allowing us to have a measurement of a bond’s price sensitivity to changes in market interest rates.Derivation of Macaulay's Duration Factor We can represent the present value, or current market price, of th...
calculation also indicates how the price will respond to shifts in interest rates by 1 percent. For example, the price of a bond with a duration of 3 years will drop by 3 percent when interest rates rise by 1 percent. The same bond's price will rise by 3 percent when interest rates ...
Bond valuation looks at discounted cash flows at their net present value if held to maturity. Duration instead measures a bond's price sensitivity to a 1% change in interest rates. Longer-term bonds have a higher duration, all else equal. Longer-term bonds will also have a larger number of...
s interest earned on the bond. To calculate the value of a zero-coupon bond, we only need to find the present value of the face value. Carrying over from the example above, the value of a zero-coupon bond with a face value of $1,000, YTM of 3% and 2 years to maturity would be...