Bond C is a 2year bond with a coupon rate of 4%. Interest is paid semiannually. Market interest rates have now increased by 80 basis points. Calculate the bond's duration using annual data but with the price calculated earlier ($984.92)
Question options:







OPTION 1 IS WRONG
Answer :
Duration = Sum of (Weights * Discounted Cash Flows) / Sum of Discounted Cash Flows
Below is the table showing calculations:
Year (Weights)  Cah Flows  PVF @4.8%  Discounted Cash Flows  Weights * Discounted Cash Flows 
1  40  0.954198473  38.16  38.16 
2  1040  0.910494726  946.86  1893.82 
Total  984.92  1931.99697 
The question has been calculated using annual rates as specified.
Duration = Sum of (Weights * Discounted Cash Flows) / Sum of Discounted Cash Flows
= 1931.99697 / 984.92
= 1.96 years
Get Answers For Free
Most questions answered within 1 hours.