Question
In: Finance
What is the duration of a 2 year zero-coupon bond that is yielding 11.5 percentage? use...
What is the duration of a 2 year zero-coupon bond that is yielding 11.5 percentage? use $1000 as the face value
Solutions
Expert Solution
| In case of zero coupon bond there is no coupon payment and thus the duration would be equal to its maturity period. | |||||||
| However we would verify the same by using the duration formula. | |||||||
| Formula to calculate duration of bond | |||||||
| Duration of bond | Sum of (CF*Year)/Price of bond | ||||||
| CF represents present value of cash flow | |||||||
| Year represents time period when cash flow is received | |||||||
| Calculation of duration of bond | |||||||
| Year | Cash flow | Discount factor @ 11.5% | Present value | CF*Year | |||
| 1 | $0 | 0.896861 | $0.00 | $0.00 | (0*1) | ||
| 2 | $1,000 | 0.804360 | $804.36 | $1,608.72 | (1608.72*2) | ||
| Total | $804.36 | $1,608.72 | |||||
| Discount factor | 1/(1.115^n) | n is number of years | |||||
| Duration of bond | 1608.72/804.36 | ||||||
| Duration of bond | 2.00 | years | |||||
| Thus, duration of zero coupon bond is 2 years | |||||||
jeff jeffy answered 9 months agoRelated Solutions
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