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What is duration of a 2-year bond that pays a coupon of 8% per annum semiannually?...

What is duration of a 2-year bond that pays a coupon of 8% per annum semiannually? The yield on the bond is 10% per annum with continuous compounding. (Show Work)

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Expert Solution

Period

Cash Flow

Discounting factor = 1/e^(Rate/2*Y)

PV of the cash flows = Cash flow x Df

Weighted cash flow = Period x Cash flow

Present value of weighted cash flow = Weighted Cash flow x Df

Y

CF

Df = 1/e^(1+5%*Y)

PV = CF x Df

WCF = CF x Y

WPV = WCF x Df

                   0.5

400

0.9753

390.1240

200.00

195.0620

                   1.0

400

0.9512

380.4918

400.00

380.4918

                   1.5

400

0.9277

371.0974

600.00

556.6461

                   2.0

1040

0.9048

941.0309

2080.00

1882.0618

Total = P =

2082.7440

Total = WP =

3014.2617

Value of e =2.71828 i.e called exponential value

Duration = WP/P = 3014.2617/2082.7440

1.45 Years

jeff jeffy answered 2 years ago
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