CFA CFA Level 1 BP change

# BP change

• Author
Posts
• pcunniff
Participant
• CFA Level 1
5

Can someone explain the BP explanation? I dont get the math. Said another way, I dont get the 4.625 to 4.875. If you could clear this up – that would be helpful!

Consider a 25-year, \$1,000 par semiannual-pay bond with a 7.5% coupon and a 9.25% YTM. Based on a yield change of 50 basis points, the approximate modified duration of the bond is closest to:

a) 10.03

b) 8.73

c) 12.5

Calculate the new bond prices at the 50 basis point change in rates both up or down and then plug into the approximate modified duration equation:

Current price: N = 50; FV = 1,000; PMT = (0.075/2) Ã— 1,000 = 37.50; I/Y = 4.625; CPT â†’ PV = \$830.54.

+50 basis pts: N = 50; FV = 1,000; PMT = (0.075/2)1,000 = 37.50; I/Y = 4.875; CPT â†’ PV = \$790.59.

â€“50 basis pts: N = 50; FV = 1,000; PMT = (0.075/2)1,000 = 37.50; I/Y = 4.375; CPT â†’ PV = \$873.93.

Approximate modified duration = (873.93 â€“ 790.59) / (2 Ã— 830.54 Ã— 0.005) = 10.03.

• fp92
Participant
• CFA Level 1
4

4.625% = 9.25% YTM / 2

4.875% = (9.25%+0.5%) / 2

4.375% = (9.25%-0.5%) / 2