Calculate the duration of bond a and bond b

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Question - Bond A pays annual coupons of $50 and has a principal amount of $1000 in 10 years' time when it expires. Bond B, on the other hand, offers semi-annual coupons of $25 and a principal of $1000 at maturity in 5 years' time. The yield to maturity(YTM) of Bonds A and B are 2.5% and 5%, respectively.

1. Calculate the duration of Bond A and Bond B. List which Bond(A or B) has the higher duration, Define what is measured by the concept of duration and explain why bonds with a higher duration are considered riskier.

2. What is the volatility of Bond A and Bond B? Based on the volatility, what would be the price of Bond A if its yield to maturity increases by 1%, and what would be the price of Bond B if its yield to maturity increases by 1%?

Reference no: EM132987990

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