Question

Your company has invested in an ABC semi-annual paying bond. The coupon is 10%, and the current yield is 6.45%. Your friend contacts you to advise that he is a big buyer of ABC bonds. He offers to buy $25,000,000 of the bond from you at 6.50%. The maturity date of the bond is the 15th of November, 2023. If you sell the bond, the settlement date will be the 4th of November, 2019.

Calculate the duration and modified duration of the bond on the 4th of November, 2019 (show all workings).

Answer 1

Investment	$2,50,00,000.00
No OF conversions	Cash Flow	Product(Year * Cash Flow)	Discount Factor @6.50%	PV of CF
1	$12,50,000.00	$12,50,000.00	0.938967136	$11,73,708.92
2	$12,50,000.00	$25,00,000.00	0.881659283	$22,04,148.21
3	$12,50,000.00	$37,50,000.00	0.827849092	$31,04,434.09
4	$12,50,000.00	$50,00,000.00	0.777323091	$38,86,615.45
5	$12,50,000.00	$62,50,000.00	0.729880837	$45,61,755.23
6	$12,50,000.00	$75,00,000.00	0.685334119	$51,40,005.89
7	$12,50,000.00	$87,50,000.00	0.643506215	$56,30,679.38
8	$12,50,000.00	$1,00,00,000.00	0.604231188	$60,42,311.88
9	$12,50,000.00	$1,12,50,000.00	0.567353228	$63,82,723.81
10	$2,62,50,000.00	$26,25,00,000.00	0.532726036	$13,98,40,584.32
			PV	$17,79,66,967.19
			Bond Duration	7.12
			Modified Duration	6.68
Note
The Above Calculation indicates that the investor needs hold the bond till 7.12 years to recover the cost
Further for Every 1% change in interest rate the bond rate will move conversely by 6.68%