Question

Consider the following.

a. What is the duration of a four-year Treasury bond with a 14 percent semiannual coupon selling at par?

b. What is the duration of a three-year Treasury bond with a 14 percent semiannual coupon selling at par?

c. What is the duration of a two-year Treasury bond with a 14 percent semiannual coupon selling at par?

Answer 1

Part A:

PV = 1,000

Coupon = 14%

YTM = 14%

N = 4 years

We will calculate duration of the bond using present value of cash flows formula:

Duration = 3,194.64/ 1,000 = 3.194645

Part 2:

PV = 1,000

Coupon = 14%

YTM = 14%

N = 3 years

We will calculate duration of the bond using present value of cash flows formula:

Duration = 2,550.10/ 1,000 = 2.550099

Part 3:

PV = 1,000

Coupon = 14%

YTM = 14%

N = 2 years

We will calculate duration of the bond using present value of cash flows formula:

Duration = 1,812.16/ 1,000 = 1.812158