Calculate duration

In Chapter Three, you learned to use the approximate duration formula. As a refresher, the formula for approximate duration is:

$$(P(down) - P(up)) / (2 * P * \Delta y)$$

where $P$ is the price of the bond today, $P(up)$ is the price of the bond if yields increase, $P(down)$ is the price of the bond if yields decrease, and $\Delta y$ is the expected change in yield.

In this exercise, you will calculate duration. Specifically, you'll use the bondprc() function to calculate px_up and px_down.

The objects px and aaa_yield from the prior exercises are preloaded in your workspace. For this exercise, assume that the expected change in yield is an increase of 1%. As before, the coupon rate is 3% (0.03) and the time to maturity 8 years.

Instructions

Use bondprc() to calculate the price of the bond when yields increase by 1%. Save this to px_up.
Use bondprc() to calculate the price of the bond when yields decrease by 1%. Save this to px_down.
Use px, px_up, and px_down to calculate duration with the formula above.
Calculate and view the percentage effect of duration on price (duration_pct_change) based on duration.
Calculate and view the dollar effect of duration on price (duration_dollar_change) based on duration.

Take Hint (-30xp)