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What is the duration (D) of a 2-year bond with a $69 annual coupon (paid annually),...

What is the duration (D) of a 2-year bond with a $69 annual coupon (paid annually), $1,000 par, and a yield of 3.5%? Record your answer to the nearest 0.001 years.

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Answer #1

Present value of year 1 cash flow = 69 / (1 + 0.035) = 66.6667

Present value of year 2 cash flow = (1000 + 69) / (1 + 0.035)^2

Present value of year 2 cash flow = 1069 / 1.071225 = 997.922939

Total value = 66.6667 + 997.922939 = 1,064.5896

Weight of year 1 cash flow = (66.6667 / 1064.5896) = 0.062622

Weight of year 2 cash flow = (997.922939 / 1064.5896) = 0.937378

1. weight * period = 0.062622 * 1 = 0.062622

2.. weight * period = 0.937378 * 2 = 1.874756

Duration = 0.062622 + 1.874756

Duration = 1.937

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