(A) PURCHASE PRICE OF THE BOND
YEAR | AMOUNT | PVF @ 3.5% | PRESENT VALUE | ||
0.5 | 35 | 0.966 | 33.81 | ||
1 | 35 | 0.934 | 32.69 | ||
1.5 | 35 | 0.902 | 31.57 | ||
2 | 35 | 0.871 | 30.485 | ||
2 | 1000 | 0.871 | 871 | ||
TOTAL | 999.555 |
HENCE, THE PURCHASE PRICE IS EQUAL TO THE FACE VALUE, i.e. $1000.
(B) DURATION OF BOND
FORMULA = [(1+Y)/Y] - [{1+Y}+PERIOD{C-Y}]/C[{1+Y}^PERIOD-1]+Y
WHERE, Y STANDS FOR YIELD TO MATURITY
C STANDS FOR COUPON RATE
IN THIS CASE, COUPON RATE AND YIELD TO MATURITY ARE SAME AS THE BOND IS GETTING REDEEMED AT PAR.
SO, SUBSTITUTING VALUES,
= (1+0.07)/0.07 - [{1+0.07} + 2{0.07-0.07}] / 0.07[{1+0.07}^2 - 1] + 0.07
= 1.93 YEARS
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