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solve all parts kinldy 8. (a) Explain the concept of Macaulay duration and explain the relationship between Macaulay duration and: () bond maturity (ii) interest
solve all parts kinldy
8. (a) Explain the concept of Macaulay duration and explain the relationship between Macaulay duration and: () bond maturity (ii) interest rates (iii) bond coupon rate (b) Calculate the price and Macaulay duration of a five-year 5% coupon bond where the market interest rate is 5%. Assume the par value of the bond is $1000 and coupons are paid annually. (c) An investor decides to construct a bond portfolio made up of $20,000 in a bond with a Macaulay duration of 5 years and $30,000 in a three-year zero- coupon bond (par value = $1,000). What is the Macaulay duration of this bond portfolio? (d) Estimate, using modified duration, the change in the price of the five-year 5% coupon bond (described in part (b)) if the market interest rate decreases from 5% to 4%. (e) Explain why the modified duration measure only gives good estimates of price changes when the change in the market interest rate being considered is smallStep by Step Solution
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