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You have discovered that when the required return of a bond you own fell by 0 50 percent from 9 75 percent to 9 25 percent the price rose from $975 to $995 What is the duration of this bond

You have discovered that when the required return of a bond you own fell by 0.50 percent from 9.75 percent to 9.25 percent, the price rose from $975 to $995. What is the duration of this bond? ( LG 3-8 )

( LG 3-8 )

Economic Meaning of Duration

So far we have calculated duration for a number of different bonds. In addition to being a measure of the average life of a bond, duration is also a direct measure of its interest rate sensitivity, or elasticity. 19 In other words, the larger the numerical value of duration ( D ), the more sensitive the price of that bond to (small) changes or shocks in interest rates. The specific relationship between these factors for securities with annual compounding of interest is represented as: 20

May 18 2020 View more View Less

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