Question

1) Compute the Macaulay duration for a 5-year bond paying annual coupons of 9% and having a yield to maturity of 9.5%.

a. 3.86 Answers: a. 3.86 b. 4.57 c. 5.00 d. 3.78 e. 4.23

2) Which of the following bonds would be cheapest to deliver given a T-note futures price of 90.4697? (Assume that all bonds have semiannual coupon payments based on a par value of $100.)

Answers: a. 9.5-year bond with 4.5% coupons and a yield of 3.5% b. 7.5-year bond with 6.5% coupons and a yield of 7.5% c. 6.5-year bond with 8.5% coupons and a yield of 8%

Please explain with steps, thank you!

Answer 1

ANS 1 e) 4.23

Year	Project Cash Flows (i)	DF@ 9.5% (ii)	PV of Project A ( (i) * (ii) )	DURATION= PRESENT VALUE* TIME
0	0	1	-	-
1	90	0.913	82.19	82.19
2	90	0.834	75.06	150.12
3	90	0.762	68.55	205.65
4	90	0.696	62.60	250.41
5	1090	0.635	692.40	3,461.99
	TOTAL		980.80	4,150.36
	DURATION =	(PRESENT VALUE*TIME)/ TOTAL PRESENT VALUE
		4150.36 / 980.80
		4.23