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On Jan 1, 2012, FIN307 is considering the newly issued 10-year AAA corporate bond, which is due Jan 1, 2022, with a coupon rate of

On Jan 1, 2012, FIN307 is considering the newly issued 10-year AAA corporate bond, which is due Jan 1, 2022, with a coupon rate of 6% per year paid every 6 months. The bond is traded at par. Suppose the market interest rate declines by 100 bps (i.e., 1%), what is the duration and modified duration (before interest rate changes) and the effect of the market interest decline on the bond price?

Hint: go to excel and do the calculation manually by setting up 6 columns for t (=1, 2, 3..20), DF(discount factor or 1/PV factor), CF (cashflow), PV (present value of CF=CF*DF), w(weight=PV/sum of PV or P0), and t*w. Then sum up all t*w, then divide by 2 (because here coupon is paid semiannually).

Please use 6% for interest rate, I provided an example of the how it suppose to look like below. Please show the work in excel, thank you.

image text in transcribed

interest = 6 t i 23 3 i 1 1 20 CF 30 x 30 ( 1 1030 x (+-+35/%) * (1+3%)2 (1+37) 3 (1731)29 PV =CFXr -1000 W = PV/1000 tow f 4 = 1001 4 = 12

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