6. Consider a bond with semi-annual coupon payments of $50, a principal payment of $1,000 in...

6. Consider a bond with semi-annual coupon payments of $50, a principal payment of $1,000 in 5 years, and a price of $1,000. Assume that the yield curve is a flat 10%. What is the duration of the bond?

Expert Solution

Bonds are financial instruments that provide fixed returns to its holders. Bonds actually have a nature of debt with a fixed interest rate and a maturity, also known as Plain Vanilla Bond. Some bonds have a callability feature which enables the issuer to call and buy back the bonds from the existing bondholders.

Given the Semi-annual coupon amount, calculate the Semi-annual Coupon Rate:

Thus, the annual Coupon Rate is 0.05*2 = 0.1 or 10%

Bond duration is the measure of the responsiveness of the bond price with respect to movements in interest rates.

It can be calculated using the Duration Function in MS – Excel:

Thus, the duration of the bond is 4.05 years.

jeff jeffy answered 2 years ago

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