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Category > Accounting Posted 10 Sep 2017 My Price 7.00

zero-coupon bond

Two bonds are available for purchase in the financial markets. The first bond is a two-year, $1,000 bond that pays an annual coupon of 10 percent. The second bond is a twoyear, $1,000, zero-coupon bond. ( LG 3-7 )

a. What is the duration of the coupon bond if the current yield to maturity is 8 percent? 10 percent? 12 percent?

b. How does the change in the current yield to maturity affect the duration of this coupon bond?

c. Calculate the duration of the zero-coupon bond with a yield to maturity of 8 percent, 10 percent, and 12 percent.

d. How does the change in the yield to maturity affect the duration of the zero-coupon bond?

e. Why does the change in the yield to maturity affect the coupon bond differently than it affects the zero-coupon bond?

( LG 3-7 )

Features of Duration

The preceding examples suggest several important features of duration relating to the time remaining to maturity, yield to maturity, and coupon interest of the underlying bond being analyzed. These features are summarized in Table 3–11 .

 

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Maurice Tutor
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Status NEW Posted 10 Sep 2017 05:09 PM My Price 7.00

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