Hi David,
In Tuckman's question set (question 16.3 page 58) : "at a rate of 4% a bond has a price of $107.93. If the rate drops by one bp to 3.99%, the bond price increases to $108. What is the estimate of the bond's effective duration ?
To answer that question, I applied the effective duration's formula : Bond Price - Bond Price if increase / 2 x Original Price x change in interest rate
which gives (108-107.93) / 2 x 107.93 x 0.0001 = 3.2428
The answer is 6.486, which is twice the answer given by the formula above.
Do I have to multiply the duration given by 2, if yes on what basis ?
Many thanks for your help
PS : I get the right answer with the DV01 formula, but I find the effective duration formula more convenient.
In Tuckman's question set (question 16.3 page 58) : "at a rate of 4% a bond has a price of $107.93. If the rate drops by one bp to 3.99%, the bond price increases to $108. What is the estimate of the bond's effective duration ?
To answer that question, I applied the effective duration's formula : Bond Price - Bond Price if increase / 2 x Original Price x change in interest rate
which gives (108-107.93) / 2 x 107.93 x 0.0001 = 3.2428
The answer is 6.486, which is twice the answer given by the formula above.
Do I have to multiply the duration given by 2, if yes on what basis ?
Many thanks for your help
PS : I get the right answer with the DV01 formula, but I find the effective duration formula more convenient.