Question
Betty and Bob buy a 20-year bond with a coupon rate of 7% per annum payable semiannually and a face and redemption value of $1000
Betty and Bob buy a 20-year bond with a coupon rate of 7% per annum payable semiannually and a face and redemption value of $1000 and which is priced to yield 10% per annum compounded semiannually.
a. Algebraically compute the price using the General Formula
b. Algebraically compute the price using the Alternative Formula
c. Algebraically compute the price using the Makeham Formula. Your final answer should be correct to 3 places after the decimal point.
d. Check your result by using the Salesmans Rule to see if it gives a yield to maturity of approximately 10% per annum.
e. Using the closed form for Macaulay duration (see email or handout) find the Macaulay duration. Your final answer should be in years and correct to 2 places after the decimal point.
f. Check your work by using Excel to find the price and Macaulay duration.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started