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A bond has a PAR value of $1,000 with a 12% coupon and a 4% semi-annually...

A bond has a PAR value of $1,000 with a 12% coupon and a 4% semi-annually compounded yield. What is

the bond’s duration given that there are two years left to maturity?

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Answer #1

Answer : Below is the Table showing Calculation of Duration :

Year (Weights) Cah Flows PVF @2% Discounted Cash Flows Weights * Discounted Cash Flows
1 60 0.980392157 58.82352941 58.82352941
2 60 0.961168781 57.67012687 115.3402537
3 60 0.942322335 56.53934007 169.6180202
4 1060 0.923845426 979.2761516 3917.104606
Total 1152.309148 4260.88641

Duration = Sum of ( Weights * Discounted Cash Flows) / Discounted Cash Flows

= 4260.88641 / 1152.309148

= 3.70 half years or 1.85 years (3.70 / 2)

Note : Since it has given that yield is semiannually compounded it has been assumed that coupon also paid semiannually.

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