Answer:
(a) 1.91 years
(b). $987.96
Explanation:
According to the scenario, computation of the given data are as follow:-
a).
Year Cash flow PVF 11% PVF 11% discount time P.V. cashflow×time
1 $100 0.901 $90.1 1 $90.1
2 $1,100 0.812 $893.2 2 $1,786.4
Total 983.3 $1,879.5
Bond price = $983.3
Bond duration = 1,879.5 ÷ 983.3 = 1.91 year
b).
1st year cash flow = $1,000 × 10÷100 = $100
2nd year cash flow = $1000 + $100 = $1,100
If interest rate are decreased by 0.3%
11% - 0.3% = 10.7%
PVF = cash flow ÷ (1+rate)
Year Cash flow($) divide PVF 10.7% PVF 11% discount ($)
1 100 ÷ 1.107(1+.107) 90.33
2 1,100 ÷ 1.225449(1+.107)^2 897.630
Total 987.96
Price of bond will be $987.96 at 10.7%.
