You have in your portfolio a coupon bond of an AA rated company. The bond pays an annual coupon rate of 8% and the redemption value is €100. The current time to maturity is 5 years and the market yield is 8.5% p.a. 

Calculate: 

a) The duration of the bond according to Macaulay (1938).

 b) The approximate change in the bond's price by a 1% increase of the interest rates making use of the modified duration formula developed by Hicks (1939). 

Please write in your solutions sheet the input parameters typed in your financial calculator.

 

 

Hint: FRA payment- dFRA N-(Tre-TFRA) B 1+ Tre D (Macaulay) M1M dFRA B t-CF (1+TIRR)" CE 1(1+TIRR)" - and dPV (Hicks) = D 1+TIRR PV dr