Question

What is the price of each of the following bonds ($1,000 principal) if the current interest rate is 6 percent?

Firm A: coupon 6%, Maturity 6 years

Firm B: coupon 6%, Maturity 12 years

Firm C: coupon 13%, Maturity 6 years

Firm D: coupon 13%, Maturity 12 years

Firm E: coupon 0%, Maturity 6 years

Firm F: coupon 0%, Maturity 12 years

b) What is the duration of each bond?

c) Rank the bonds in terms of price fluctuations with the least volatile bond first and the most volatile bond last as judged by each bond’s duration

d) Confirm your volatility ranking by determining the percentage change in the price of each bond if interest rates rise up to 9%.

e) What generalizations can be made from the above exercise (2 Points)

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

e.

Duration is measure of price sensitivity of bond due to change in interest rate.

Bond with longer maturity and lower coupon rate would have higher duration and vice versa.