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You have constructed a table to calculate the duration of 2 year coupon paying bonds issued by Earth Bank at a yield of 5% pa compounded half-yearly. The bonds have a face value of $120,000 and a coupon rate of 4% pa compounded half-yearly. You printed up the table so that you could take it to a meeting, but unfortunately the final row has been cut off the printout.
a) Complete the table. Give your answers as decimals to 4 decimal places.
Cash flow
Amount ($)
Present value of the cash flow (PVCF)
Weight (PVCF/price)
1
2,400
2,341.4634
0.0199
2
2,284.3546
0.0194
3
2,228.6386
0.0189
4
b) Calculate the duration (D) of the Earth Bank bonds using the rounded values in the table. Give your answer in years to 2 decimal places. D = years?
c) If the yield were to decrease immediately, the duration of the bonds would: Increase, decrease or remain unchanged?
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