Question

Calculate the duration of a two-year, $1,000 bond that pays an annual coupon of 10 percent...

Calculate the duration of a two-year, $1,000 bond that pays an annual coupon of 10 percent and trades at a yield of 14 percent. What is the expected change in the price of the bond if interest rates decline by 0.50 percent? (2 points)? (show all the work!)

Homework Answers

Answer #1

Given,

Par value = $1000

Coupon rate = 10%

Yeild Rate = 14%

Maturity = 2 years

Time CF

PV of CF

(CF*(100/r)^n)

PV of CF * Time

1 100 87.72

87.72

2 1100 846.41 1692.83
Total 934.13 1780.55

Duration , D= 1780.55/934.13

=1.9061

If interest rate decline by 0.50 %

expected change in price=

=

=$ 7.81

The expected change the price when interest rate decline by 0.50% is $7.81

And the new price =$934.13+$7.81

=$941.94

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