Question

1. Suppose a bond has a life of three periods. It offers $50 coupon payments in periods 1,2, and 3. It has a face value of $1000. If the relevant interest rate is 8% for period 1, 5% in period 2, and 10% in period 3, what is the present value of this bond?

2. Some bond has a life of 4 periods, a spot yield of 5%, pays a coupon of $35 on each of the years (including at maturity), a face value of $800, and currently has a price of $1000.

a. What is the Macaulay duration of this bond?

b. Now suppose you have a liability stream with a Macaulay duration of 2 periods. If you wanted to immunize the portfolio and the only other bond has a Macaulay duration of 1.5, in what proportions should you hold these 2 stocks?

Answer 1