Question
Consider the sale of a bond at a face value of US$1,000, with six years to maturity and a coupon rate of 7% per year.
Consider the sale of a bond at a face value of US$1,000, with six years to maturity and a coupon rate of 7% per year.
Required:
i) Calculate the duration of the bond. (4 points)
ii) What is the modified duration of the bond? (3 points)
iii) If the yield to maturity of the bond increases to 8%, what happens?
to the duration of the bonds? Why does this change occur? (4 points)
iv) Why must the duration of a coupon bond always be less
than the time to its maturity date? (3 points)
Step by Step Solution
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There are 3 Steps involved in it
Step: 1
i Duration of the Bond To calculate the duration of the bond we need to consider the timeweighted present value of all cash flows In this case the bon...Get Instant Access to Expert-Tailored Solutions
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Step: 2
Step: 3
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Financial Accounting an introduction to concepts, methods and uses
Authors: Clyde P. Stickney, Roman L. Weil, Katherine Schipper, Jennifer Francis
13th Edition
978-0538776080, 324651147, 538776080, 9780324651140, 978-0324789003
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