Princeton University
Department of Economics
Economics 362
Fall Term 20092010
Problem Set 9
Bond Market – Term Structure
1.
A nineyear bond has a yield of 10% and a duration of 7.194 years.
If the market
yield rises by 50 basis points, what is the percentage change in the bond’s price?
2. Find the duration of a 6% coupon bond making annual
coupon payments if it has
three years until maturity and has a yield to maturity of 6%.
What is the duration if
the yield to maturity is 10%?
3.
Find the duration of the bond in problem 2 with a yield of 6% if the coupons are paid
semiannually.
(Hint: Use Rule 8, in text p. 468.)
4.
The following questions are from past CFA examinations:
a)
A 6% coupon bond paying interest annually has a modified duration of 10 years,
sells for $800, and is priced at a yield to maturity of 8%.
If the YTM increases to
9%, the predicted change in price, using the duration concept, decreases by:
i)
$76.56
ii) $75.92
iii) $77.67
iv) $80.00
b) A 6% coupon bond with semiannual coupons has a convexity (in years) of 120,
sells for 80% of par, and is priced at a yield to maturity of 8%.
If the YTM
increases to 9.5%, the predicted contribution to the percentage change in price,
due to convexity, would be:
i)
1.08%
ii) 1.35%
iii) 2.48%
iv) 7.35%
1
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 '08
 HARRISONHONG
 Economics, Interest Rates, Zerocoupon bond, future oneyear rate

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