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An insurance company is analysing three bonds (A, B and C) and is using duration as the measure of interest rate risk. All three bonds
An insurance company is analysing three bonds (A, B and C) and is using duration as the measure of interest rate risk. All three bonds trade at a yield to maturity of 10 per cent, have $10 000 par values, five years to maturity. The bonds differ only in the amount of annual coupon interest that they pay: 8, 10, and 12 per cent as fol Bond (A) t CF PV of CF PV of CF xt 11 $800) $727.27 $727.27 2 $800 $661.16 $1 322.31 3 $800 $601.06 $1 803.16 4 $800 $546.41 $2 185.64 5 $10 800 $6705.95 $33 259.75 $9241.84 Bond (B) t CF PV of CF PV of CF xt 1 $ 1 000 $909.09 $909.09 2 $ 1 000 $826.45 $1 652.89 3 $ 1 000 $751.31 $2 253.94 4 $ 1 000 $683.01 $2 732.05 5 $11 000 $6 830.13 $34 150.67 $10 000.00 Bond (C) t CF PV of CF PV of CF xt Which of the following duration is TRUE? 1 $1 200 $1090.91 $1 090.91 2 $1 200 $991.74 $1 983.47 3 $1 200 $901.58 $2704.73 $3 278.46 4 $1 200 $819.62 5 $11 200 $6 954.32 $34 771.59 $10 758.16 O A None of the other listed options is correct. OB. Duration of Bond B is 4.2814 years O C. Duration of Bond B is higher than duration of Bond. OD No information to decide. O E. Duration of Bond B is higher than duration of Bond C
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