Question

A bond has a PAR value of $1,000 with a 12% coupon and a 4% semi-annually compounded yield. What is the bond's duration given that there are two years left to maturity?

Answer 1

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 4% / 2 = 0.02

And n is the no of Compounding periods 2 years * 2 = 4

Coupon 12% /2 = 0.06

=

=1152.31

Duration

Time	Cash Flow	PV Factor @ 0.04 / 2 = 0.02	PV of Cash Flow	PV * TIme
0.5	60	0.98039215686	58.8235294116	29.4117647058
1	60	0.96116878123	57.6701268738	57.6701268738
1.50	60	0.94232233453	56.5393400718	84.8090101077
2	1060	0.923845426	979.27615156	1958.55230312
				2131.44

Duration = 2131.44 / Value of Bond

Duration = 2131.44 / 1152.31

= 1.85

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