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Bond B has a $1,000 par value and a 7% coupon rate, three years remaining to...

Bond B has a $1,000 par value and a 7% coupon rate, three years remaining to maturity, and a 9% yield to maturity. The duration of Bond B is _____ years. The modified duration of Bond B is

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Answer

Time period cash flow PV of cash flow PV of time waighted cash flow
1 70 65.42 65.42
2 70 61.14 122.28
3 1070 873.43 2620.29
999.99 2807.99

PV of cash flow = cash flow /(1+coupon rate)

PV of time waighted cash flow =pv of cash flow * time period

Duration of bond= PV of​ time waighted cash flow / PV of cash flow

Duration of bond =2807.99/999.99

=2.80 year

Modified Duration = Duration /1+Yk/K   

Yk= YTM

K= compounding frequency

= 2.80/1+0.09/1

=2.56 year

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