A Ford Motor Co. coupon bond has a coupon rate of 5.7%, a face value of $1,000,

Question

A Ford Motor Co. coupon bond has a coupon rate of 5.7%, a face value of $1,000, and pays annual coupons. The bond will mature in 4 years. The bond's yield-to- maturity is 5.2%. What is this bond's Macaulay Duration (MacD)? (Hint: Not covered in the eText. Check out your class notes and the TopHat note titled "Bond risk and duration". Step 1: Find the coupon amounts and draw the cashflow timeline Step 2: Compute the bond's price discounting each cashflow one by one from Step 1 at the bond's yield-to-maturity. of 2. Step 4: Add up the terms from Step 3 and divide the sum by the bond's price from Step2. This is the bond's MacD)

Explanation / Answer

Step 4 =  $3,756.08 / $1,017.65

= 3.69

Period Step 1 PV of $1 Step 2 Step 3 1 $57 $0.951 $54.18 $54.18 2 $57 $0.904 $51.50 $103.01 3 $57 $0.859 $48.96 $146.88 4 $1,057 $0.816 $863.00 $3,452.01 Total $1,017.65 $3,756.08

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