Question

a. Find the duration of a 6% coupon bond making annual coupon payments if it has three years until maturity and has a yield to maturity of 6%. Note: The face value of the bond is $1,000. (Do not round intermediate calculations. Round your answers to 3 decimal places.) b. What is the duration if the yield to maturity is 10%

Answer 1

Answer:

A) the formula to calculate modified duration of bonds:

modified duration = [1 - (1 + y)⁻ⁿ] / y

modified duration = [1 - (1 + 6%)⁻³] / 6%  = 2.673 years

if you want to determine the Macaulay duration = modified duration x (1 + yield) = 2.673 years x 1.06 = 2.833 years

B)   modified duration = [1 - (1 + 10%)⁻³] / 10%  = 2.487 years

if you want to determine the Macaulay duration = modified duration x (1 + yield) = 2.487 years x 1.1 = 2.736 years