Two bonds are available for purchase in the financial markets. The first bond is a two-year, $1,000 bond that pays an annual coupon of 10 percent. The second bond is a two-year, $1,000 zero-coupon bond.

A What is the duration of the coupon bond if the current yield to maturity (R) is 8 percent? 10 percent? 12 percent? ( Hint: You may wish to create a spreadsheet program to assist in the calculations.)

B How does the change in the 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 percent, 10 percent, and 12 percent.

D How does the change in the yield to maturity affect the duration of the zero-coupon bond?

E Why does the change in the yield to maturity affect the coupon bond differently than it affects the zero-coupon bond?