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Bond Price Volatility - Problem Set

This document contains practice problems related to bond price volatility and duration. It includes questions about: 1) Why the price impact of a 100 basis point yield change may differ depending on if yields increase or decrease. 2) Calculating duration, price value of a basis point, and approximate duration for two sample bonds. 3) Determining which of three bonds would have the greatest price volatility based on their coupon rates and maturities.

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Hitesh Jain
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305 views

Bond Price Volatility - Problem Set

This document contains practice problems related to bond price volatility and duration. It includes questions about: 1) Why the price impact of a 100 basis point yield change may differ depending on if yields increase or decrease. 2) Calculating duration, price value of a basis point, and approximate duration for two sample bonds. 3) Determining which of three bonds would have the greatest price volatility based on their coupon rates and maturities.

Uploaded by

Hitesh Jain
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Bond Price Volatility

Practice Problems (Fabozzi)

1 Macaulay Duration

2 Modified Duration

y = yield/2
3 duration in years

4 Modified Duration

5 approximate duration =

6 approximate convexity measure =

.
1. The price value of a basis point will be the same regardless if the yield is increased
or decreased by 1 basis point. However, the price value of 100 basis points (i.e., the
change in price for a 100-basis-point change in interest rates) will not be the same
if the yield is increased or decreased by 100 basis points. Why?

2. Calculate the requested measures in parts (a) through (f) for bonds A and B
(assume that each bond pays interest semiannually):

Bond A Bond B
Coupon 8% 9%
Yield to maturity 8% 8%
Maturity (years) 2 5
Par $100.00 $100.00
Price $100.00 $104.055

(a) What is the price value of a basis point for bonds A and B?
(b) Compute the Macaulay durations for the two bonds.
(c) Compute the modified duration for the two bonds
(d) Compute the approximate duration for bonds A and B using the shortcut
formula by changing yields by 20 basis points and compare your answers with
those calculated in part c)

3. Can you tell from the following information which of the following three bonds
will have the greatest price volatility, assuming that each is trading to offer the
same yield to maturity?

Bond Coupon Rate (%) Maturity (years)


X 8 9
Y 10 11
Z 11 12
4. Answer the below questions for bonds A and B.

Bond A Bond B
Coupon 8% 9%
Yield to maturity 8% 8%
Maturity (years) 2 5
Par $100.00 $100.00
Price $100.00 $104.055

(a) Calculate the actual price of the bonds for a 100-basis-point increase in interest
rates.

(b) Using duration, estimate the price of the bonds for a 100-basis-point increase
in interest rates.

5. Duration of a Zero Coupon Bond is equal to its maturity. Prove this statement.
6. The price of a zero-coupon bond moves towards par as it reaches maturity. Prove this
statement.

7. State why you would agree or disagree with the following statement: When interest
rates are low, there will be little difference between the Macaulay duration and
modified duration measures

8. State why you would agree or disagree with the following statement: For a 1-basis
point change in yield, the price value of a basis point is equal to the dollar duration.

9. Consider the following two Treasury securities:

Bond Price Modified duration (years)


A $100 6
B $80 7

Which bond will have the greater dollar price volatility for a 25-basis-point change in
interest rates?

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