In: Finance
Compute the duration of a three-year bond, given an annual coupon of 7%, and a current market price of $900. What would be the maturity of a zero-coupon bond with the same duration? (Hint: remember to start with the IRR (YTM) calculation).
Current Price =900
Coupon 7%
Maturity = 3 years
SInce the Current Price of Bond > Par Value, the TYM will be less than Coupon.
Let's assume the YTM be 11%
Value of Bond =
=
= 902.25
Now,
Let's assume the YTM be 12%
Value of Bond =
=
= 879.91
Using interpolation
YTM =
= 11% + ((902.25 - 900) / (902.25 - 900) + (900 - 879.91)) * (12-11)
= 11% + 10
= 11.10%
Value of ZCB = 1000 / (1+r)^n
r = 0.1110
n = 3
= 1000 / (1+0.1110)^3
=729.22