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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

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