Question

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

Answer #1

**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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