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Need help! 3. Estimate the DURATION of a par value 5 year, 20% coupon bond. For your convenience, just fill in the table below. Remember
Need help! 3. Estimate the DURATION of a par value 5 year, 20% coupon bond. For your convenience, just fill in the table below. Remember that the DURATION is the time, in years, that it'll take you to recover your initial investment on the bond. (1+0.20)+ = $96.45 Column 1 shows the years 1-5. Column 2 shows the stream of payments you will get: $200 per year during 5 years plus the Face Value of $1000 paid at the end of the 5th year. For Column 3 you need to estimate the present value of each of the coupon payment as if each were a single payment (i.e. the estimation of PV for Year 1 is PVyear 1 = 1201 = $166.67 And for year 4 is PVyear 4 = In Column 4 you need to estimate the percentage of the total value of the bond (which is $1000) that you receive each year (i.e. you divide the PV in column 3 by $1000). In Column 5 you estimate the weighted maturity or how much of the total time to mature, in years, was covered by the PV of the payments received in years 1-5. For year 5, you also include the payment of the Face Value. The DURATION WILL BE THE ADDITION OF YOUR RESULTS IN COLUMN 5. IT WILL TELL YOU THE DURATION, IN YEARS, THAT IT'LL TAKE THE STREAM OF PAYMENT YOU WILL RECEIVE TO COVER YOUR INITIAL INVESTMENT OF $1000 (you bought a par-value bond). % PV of Total Value Weighted Maturity PV/$1000 (1)*(4) Year WN Coupon 20% 200 200 200 200 200 un Um 1000 $1,000.00 100.00% Duration= a. Interpret your results. What does duration tell you
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