Question

Consider the following. a. What is the duration of a two-year bond that pays an annual coupon of 12 percent and whose current yield to maturity is 14 percent? Use $1,000 as the face value. (Do not round intermediate calculations. Round your answer to 3 decimal places. (e.g., 32.161)) Duration of a bond ?

b. What is the expected change in the price of the bond if interest rates are expected to decline by 0.4 percent? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) Expected change in the price?

Answer 1

a) Statement showing duration of bond

Year	Interest	Repayment of principal	Total	PVIF @ 14%	Present value	Weight	Duration of bond = Weight * year
1	120		120	0.8772	105.263	0.109	0.109
2	120	1000	1120	0.7695	861.804	0.891	1.782
					967.067		1.891

Thus duration of bond = 1.891 years

b) If Expected rate is 13.6% then value of bond is as follows

Year	Interest	Repayment of principal	Total	PVIF @ 13.6%	Present value
1	120		120	0.8803	105.634
2	120	1000	1120	0.7749	867.883
Value of bond					973.517

Thus expected change in price = 973.517-967.067 = 6.450

expected change in %= 973.517-967.067/967.067

=6.67%