Question

A bond pays annual interest. Its coupon rate is 9.6%. Its value at maturity is $1,000. It matures in 4 years. Its yield to maturity is currently 6.6%. The modified duration of this bond is ______ years.

Answer 1

Step 1: Calculation of Duration

time	Cash flow	[email protected]%	Present Value (Cashflow*PVAF/PVF)	Weight based on PV	Time * weight
1	96	0.9381	90.06	0.0817	0.0817
2	96	0.8800	84.48	0.0766	0.1532
3	96	0.8255	79.25	0.0719	0.2156
4	1096	0.7744	848.75	0.7698	3.0793

Duration = Time * weight

=.0817+.1532+.2156+3.0793

= 3.5298 years

Step 2: Calculation of Modified Duration

Modified Duration = Duration / (1+Yield to maturity)

= 3.5298 / 1.066

= 3.3113

= 3.31 years