Question
In: Finance
Assume the term structure of interest rates is flat and the market interest rate is r...
Assume the term structure of interest rates is flat and the market interest rate is r = 10% per year, annually compounded.
(a) What are the Macaulay duration and modified duration of an annual coupon bond with a coupon rate of 5%/year, and a maturity of 10 years?
b) What is the Macaulay duration of a perpetuity that pays $10/year?
Solutions
Expert Solution
a.
So,
Macaulay Duration = 7.66 years
Modified Duration = 7.66/1.10 = 6.96 years
B.
Macaulay Duration of Perpetuity = (1 + 0.10)/0.10
Macaulay Duration = 11
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The term structure of interest rates relates?
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