The Macaulay's duration of a bond is 10.7 years. Bond prices will increase by around 10% if rates drop from 7% to 6%.
The Macaulay duration estimates the weighted average period that a bond must be kept until its entire present value of future cash flows equals its purchase price. It is frequently employed in bond immunization techniques.
By multiplying the time period by the periodic coupon payment and dividing the resultant value by 1 plus the periodic yield rising to the maturity date, the Macaulay duration is determined.
1.86 years, or 3.7132 semiannual intervals, make up the Macaulay Duration. With all other factors being equal, the amount of the % change increases (decreases) with the length of the bond's term, n.
Modified Duration = Macaulay's duration/(1 + i)
= 10.7/1.07
= 10
% Change in Price = -Modified duration × Change in interest rates
= -10 × -1%
= 10%
To learn more about Macaulay's duration:
https://brainly.com/question/28232599
#SPJ4
