Calculate the value of duration for a four-year, $1,000 par value U.S. Governmen

Question

Calculate the value of duration for a four-year, $1,000 par value U.S. Government bond purchased today at a yield to maturity of 15 percent. The bond

Explanation / Answer

At yield rate = 15% = 0.15, coupon rate 12% = 0.12, n= periods 4, face value = $1000 Price or PV of bond = PV of cash inflows + PV of terminal value => = 1000*0.12((1+0.15)^4 -1)/(0.15(1+0.15)^4)+ 1000/(1+0.15)^4 => = 914.35 ($) At market rate = yield rate = 14%, other data as earlier, Price or PV of bond = PV of cash inflows + PV of terminal value => = 1000*0.12((1+0.14)^4 -1)/(0.14(1+0.14)^4)+ 1000/(1+0.14)^4 => = 941.73 ($) %age change in bond's price = (941.73 - 914.35)/914.35 *100 = 2.99% (SAY = 3%) (ANSWER)

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