Philip Morris has issued bonds that pay semi-annually with following characteristics:
Coupon YTM Maturity Maturity Duration
8% 8% 15 years 10 Years
a) Calculate the modified duration using the information above.
b) Explain why modified duration is a better measure than maturity when calculating the bond's sensitivity to changes in interest rates.
c) Identify the direction of change in modified duration
if: i) The coupon of the bond were 4%, not 8%.
ii) The maturity of the bond were 7 years 7 years, not 15 years.
Answer and explain