(Financial Institutions and markets)

Find the DURATION for a corporate bond pays 7% coupon interest, paid semi-annual ually, if the bond matures after 3 years and has 5% yield to maturity, face value is $1000. (((EXPLAIN YOUR ANSWER)))

Formula you should use is

Example of the question

0 Duration (Dur) for a fixed-income security that pays interest annually can be written as: Dur TL CF xt 21=1 (1 + r) &F=PV, Xt Po Po Po= Current price of the security t=1 to T, the period in which a cash flow is received T= the number of years to maturity CE = cash flow received at end of period t r= yield to maturity or required rate of return PV = present value of cash flow received at end of period t O 8% Coupon, 2 year maturity semi-annual payment bond with a 6% ytm, face value $1000. Solution: The Duration = 1960.05/1037.15= 1.89 years Time (t) Cash flow (CFD) PV of Cash Flow PV of Cash Flow Xt 40 38.83 19241 1 40 37.70 37.70 1112 40 36.60 54.9 2 1040 924.02 1848.04 Sum= 1037.15 Sum= 1960.05