Relationship between duration and other variables

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Reference no: EM132049201

A 10-year bond w/ 7% coupon interest paid annually and a yield to maturity (bond’s interest rate) is 8%.

Calculate the bond’ price (value).

Compute the bond’s duration using Excel (Macaulay’s and Modified). Explain why the duration is a better measure than maturity when calculating the bond’s sensitivity to changes in interest rates.

Using the bond valuation technique, calculate the new bond price (value) if the bond’s interest increases to 8.1%? Compute price change and the % change in bond price.

Using the (modified) duration formula in the book and the notes, what will happen to the bond price if the bond’s interest rate increases to 8.1% (price change and the % change in bond price)?

Compare your answer in c. and in d. Are they the same?

Given the following information, answer a and b.

BondCoupon Time to maturityYield to maturity

A 15%20 years10%

B 15%15 years10%

C 0%20 years10%

D 8%20 years10%

E 15%15 years15%

Based on the summary of the relationship between duration and other variables, rank the following bonds in order of decreasing durations (without doing any calculations).

Using the Excel approach that we covered in class, calculate actual duration of each bond and check if your results are consistent with a.

Reference no: EM132049201

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