Question

a. What is the duration of a two-year bond that pays an annual coupon of 11 percent and has a current yield to maturity of 13.7 percent? Use $1,000 as the face value. (Do not round intermediate calculations. Round your answer to 4 decimal places. (e.g., 32.1616)) (in years)

b. What is the duration of a two-year zero-coupon bond that is yielding 11.5 percent? Use $1,000 as the face value. (in years )

Answer 1

Dear Students

Please note the solutions

a)

Year	Coupen Amount	PV @ 13.7%	PV * Year
1	110	96.75	96.75
2	1110	858.62	1717.24
		955.37	1813.99

Duration = Sum of year * Present Value of Cash flow / Present Value of Cash flow

              = 1813.99 / 955.37

              = 1.90 years

b)

Year	Coupen Amount	PV @ 11.5%	PV * Year
1	110	98.66	98.66
2	1110	892.84	1785.68
		991.5	1884.34

Duration = 1884.34 / 991.5

            = 1.90 years