Question

Financial analysts forecast L Brands (LB) growth for the future to be 13.4 percent. LB's most recent dividend was $2.20. What is the fair present value of L Brands’s stock if the required rate of return is 16.3 percent? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

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a. What is the duration of a two-year bond that pays an annual coupon of 10.7 percent and has a current yield to maturity of 13.1 percent? Use $1,000 as the face value. (Do not round intermediate calculations. Round your answer to 4 decimal places. (e.g., 32.1616))

b. What is the duration of a two-year zero-coupon bond that is yielding 11.5 percent? Use $1,000 as the face value.

Answer 1

Answer A.

Year (t)	Cash Flow	PV @13.1	% of value PV/PRICE	Weighted % of Value (PV/PRICE)*t
1	100		9.24%	0.924
2	1,100	966.1990	90.76%	1.8152
Total		966.1990	100%	1.9076

Duration 1.9076 Years

Answer B.

Actually, no need to calculate at all since we know that zero coupon bond is purely a discount bond.No coupon payments are made during the tenure of the bond.As such, duration is equal to the term to maturity of the bond. Therefore, duration is 2 years.

Duration always will be lower than the maturity for a coupon bond. That is because duration takes into account the timing of cash flows. The only time duration equals maturity is when there is only one single payment, as is the case with zero-coupon bonds.