Question

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

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

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

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