Question

In: Finance

Calculate the duration for a bond with an annual coupon of 8%, nominal value of 100...

Calculate the duration for a bond with an annual coupon of 8%, nominal value of 100 euros, time until maturity 5 years and yield at maturity equal to 10%.
a) What is the modified duration of the bond?
b) What do we call yield to maturity at the end of a bond and what does it represent? What is the relationship between the current and the nominal value of the bond when the bond is traded for, under, or even?
c) If the yield on maturity increases sharply from 10% to 10.30%, what will be the new bond price?

Solutions

Expert Solution

a)

Duration = sum of (weights * years) / sum of years where weights are proportion of present value of cash flows to the total value of present value of cash flows.

Years Cashflow Discounting Factor @ 10%(1/ (1+r)^n) Present Value of cash flows ( C= A*B) Weight weight * year
1 8 0.909090909 7.27 0.078693 0.078693477
2 8 0.826446281 6.61 0.071540 0.143079048
3 8 0.751314801 6.01 0.065036 0.195107793
4 8 0.683013455 5.46 0.059124 0.236494295
5 108 0.620921323 67.06 0.725607 3.628037474
Total 92.42 1.000000 4.281412086

Duration = 4.2814 years

Modified duration = Duration / ( 1 + ytm factor) = 4.2814 / ( 1.1) = 3.89%

b)

the yield to maturity moves closer to coupon rate as an when the maturity is nearing by. So here ytm of 10 % will be close to 8% when the bond reaches maturity.

When the bond is traded under, current value is lower than the nominal value and the ytm shall be higher than the coupon rate.

When the bond is traded over, current value is higher than the nominal value and the ytm shall be lower than the coupon rate.

c)

Price of the bond = coupon * [ ( 1 - ( 1+r)^-n ] / r + pricipal * 1/ (1+r)^n

= 8 * [ ( 1- 1.1^-5 )/ 0.1 ] + 100 * 1/ 1.1^5

Years Cashflow Discounting Factor @ 10.3%(1/ (1+r)^n) Present Value of cash flows ( C= A*B)
1 8 0.906618314 7.25
2 8 0.821956767 6.58
3 8 0.745201058 5.96
4 8 0.675612926 5.40
5 108 0.612523052 66.15
Total 91.35

New bond price = $91.35


Related Solutions

What is the duration of a 5 year, 8% semi-annual coupon bond with a face value...
What is the duration of a 5 year, 8% semi-annual coupon bond with a face value of $1,000 that is currently selling at a YTM of 10%?
a. What is the duration of a 5-year 8% annual coupon bond with a par value of $100 if the prevailing continuously compounded interest rate is 10%?
  a. What is the duration of a 5-year 8% annual coupon bond with a par value of $100 if the prevailing continuously compounded interest rate is 10%? b. What is the duration of a 5-year 12% annual coupon bond with a par value of $100 if the prevailing continuously compounded interest rate is 10%? What does this tell you about the relationship between coupon rates and duration? Comment. c. What is the duration of a 5-year 8% annual coupon...
The duration of a bond with 8% annual coupon rate when the yield to maturity is...
The duration of a bond with 8% annual coupon rate when the yield to maturity is 10% and two years left to maturity is: Question 10 options: 1) 1.75 years 2) 1.80 years 3) 1.92 years 4) 2.96 years
What is the duration of a par bond with an annual 8% coupon with exactly 5...
What is the duration of a par bond with an annual 8% coupon with exactly 5 years to maturity? Please enter your answer in years rounded to two decimal places.
Find the duration of a 8% coupon bond making annual coupon payments if it has three...
Find the duration of a 8% coupon bond making annual coupon payments if it has three years until maturity and a yield to maturity of 7%. Find the bond price. If the market interest rates decrease by .5% per year (i.e. YTM becomes 6.5%). Use duration formula to find how such interest rate change will affect the bond price? Find the new bond price using a financial calculator. Compare actual and duration predicted bond price changes. Which change is larger?...
Find the duration of a 8% coupon bond making annual coupon payments if it has 3...
Find the duration of a 8% coupon bond making annual coupon payments if it has 3 years until maturity and has a yield to maturity of 10%. Note: The face value of the bond is $1,000. (Do not round intermediate calculations. Round your answers to 3 decimal places.) 10% YTM: Duration = ________ years
2) a. What is the duration of a 5-year 8% annual coupon bond with a par...
2) a. What is the duration of a 5-year 8% annual coupon bond with a par value of $100 if the prevailing continuously compounded interest rate is 10%? b. What is the duration of a 5-year 12% annual coupon bond with a par value of $100 if the prevailing continuously compounded interest rate is 10%? What does this tell you about the relationship between coupon rates and duration? Comment. c. What is the duration of a 5-year 8% annual coupon...
A 5-year 10% annual coupon bond is trading at par. when we calculate the duration of...
A 5-year 10% annual coupon bond is trading at par. when we calculate the duration of this bond ___% is the weight of the first coupon that will be paid one year from today
Calculate the price of an 8% coupon, $1000 face value, 2-year bond that pays semi-annual coupons...
Calculate the price of an 8% coupon, $1000 face value, 2-year bond that pays semi-annual coupons if the appropriate annual discount rate is 12%. Suppose the annual discount rate on this bond rises to 16% after six months and you sell the bond at the end of the first year. What return did you actually make for the one year that you held this bond? Please show all work and do not use excel or a finance calculator.
a. Find the duration of a 10% coupon bond making annual coupon payments if it has...
a. Find the duration of a 10% coupon bond making annual coupon payments if it has three years until maturity and has a yield to maturity of 10%. Note: The face value of the bond is $1,000. b. What is the duration if the yield to maturity is 13%? Note: The face value of the bond is $1,000.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT