Question

a. Find the duration of a 7% coupon bond making annual coupon payments if it has three years until maturity and has a yield to maturity of 7%. Note: The face value of the bond is $1,000.

b. What is the duration if the yield to maturity is 8.4%? Note: The face value of the bond is $1,000.

Answer 1

Duartion = SUm [ Weight * Year ]

Part A:

Year	CF	PVF @7%	Disc CF	Weight	WT * Year
1	$      70.00	0.9346	$   65.42	0.0654	0.0654
2	$      70.00	0.8734	$   61.14	0.0611	0.1223
3	$      70.00	0.8163	$   57.14	0.0571	0.1714
3	$ 1,000.00	0.8163	$ 816.30	0.8163	2.4489
Duration					2.8080

Part B:

Year	CF	PVF @8.4%	Disc CF	Weight	WT * Year
1	$      70.00	0.9225	$   64.58	0.0670	0.0670
2	$      70.00	0.8510	$   59.57	0.0618	0.1236
3	$      70.00	0.7851	$   54.96	0.0570	0.1710
3	$ 1,000.00	0.7851	$ 785.08	0.8142	2.4427
Duration					2.8043