Two bonds are available for purchase in the financial markets. The first bond is a two-year,$1000 bond that pays an annual coupon of 10%. The second bond is a two-year ,$1000,zero-coupon bond.

1. Two bonds are available for purchase in the financial markets. The first bond is a two-year, $1000 bond that pays an annual coupon of 10 %. The second bond is a two-year, $1000, zero-coupon bond. (a) What is the duration of the coupon bond if the current yield-to-maturity (R) is 8 %? 10 %? 12 %? Coupon bond: Par value = $1000 Coupon rate = 10% Annual payments R = 8% t Maturity = 2 years CFPV of CFPV of CF xt Duration = R = 10% t CF Maturity = 2 years PV of CF PV of CF xt Duration = R = 12% t CF Maturity = 2 years PV of CF PV of CF xt Duration = (b) How does the change in the current yield to maturity affect the duration of this coupon bond? (c) Calculate the duration of the zero-coupon bond with a yield to maturity of 8 %, 10 % and 12% Zero-coupon bond: Par value = $1000 Coupon rate = 0% R = 8% t CF Maturity = 2 years PV of CF PV of CFxt Duration = R = 10% Maturity = 2 years t CFPV of CFPV of CF xt Duration =