Question

Bond C is a 2-year bond with a coupon rate of 4%. Interest is paid semi-annually. 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:

1)	2.00 years (THIS OPTION IS WRONG)

2)	1.52 years

3)	1.96 years

4)	1.87 years

OPTION 1 IS WRONG

Answer 1

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