These problems are to be done in Excel. You may work in groups of up to four peo

Question

These problems are to be done in Excel. You may work in groups of up to four people. Please be sure to put each group member's name in the Excel sheet. The due date will be given in class and via e-mail. 1, What is the Macaulay duration of a 5-year zero-coupon bond if the appropriate discount rate is 10%? 2, What is the Macaulay duration of a 3-year, 4% bond if the market yield on investments of similar risk is 3%? 3, what is the Macaulay duration of an 8-year, 4% semi-annual bond if the market yield on investments of similar risk is 4.4%? 4. What is the modified duration of the bonds in Problems 1-3 5. Using the formula for modified duration, what will the price of the bond in Problem 2 be if the interest rate increased to 3.1%? what will be the percentage change in the bond's price? what will be the dollar change? 6. Using the formula for modified duration, what will the price of the bond in Problem 3 be if the interest rate decreased to 4.3%? what will be the percentage change in the bond's price? What will be the dollar change?

Explanation / Answer

1. Macaulay duration = sum of [(tC/(1+y)^t+nM/(1+y)^n)]/P

where t is the period in which coupon is received, C is periodic coupon payment, y = required yield, n = no. of periods, M = maturity value, and P = market price.

As a zero coupon bond has no coupon the formula will be (assuming a par value of $1,000) = ((0+5*(1000)/(1+0.10)^1)/(0+1000/(1+0.10)^1))

= 5

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