You Hold a Bond with a Duration of 17

question 12

Essay

You hold a bond with a duration of 17. Its yield is 6% while the cash (one-year) rate is 4%. You expect yields to move down by 10 basis points over the year.
a. Give a rough estimate of your expected return.
b. What is the risk premium on this bond?

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Definitions:

Fairness

In economics and social policy, fairness relates to equitable treatment and distribution of resources and opportunities among individuals and groups, often debated in the context of income distribution and access to services.

Price Increases

A rise in the cost of goods or services over a period, often due to factors like inflation, increased costs of production, or supply and demand shifts.

Higher Costs

Situations where the expenses associated with producing goods or services are elevated, often reducing profitability.

Business Firms

Business firms are entities that engage in professional, commercial, or industrial activities with the aim of generating profits from their operations.