Question

Consider two bonds, both pay annual interest.  Bond C has a coupon rate of 7% annually, with...

Consider two bonds, both pay annual interest.  Bond C has a coupon rate of 7% annually, with 5 years to maturity. Bond D has a coupon rate of 8% annually with 5 years to maturity. The yield to maturity today for these bonds is 6%.

What is the Modified duration for Bond C

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Answer #1

Bond C:

Coupon rate (c) = 7%

Yield to maturity (y) = 6%

Maturity (n) = 5

Firstly, we need to calculate the duration of Bond C in order to calculate Modified duration of Bond C.

We can calcualte duration of Bond with following equation:

putting the values for Bond C

And, Modified duration can be computed with following equation:

putting the value of Bond C

Modified Duration of Bond C = 4.1521

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