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An organization purchased a four-year $10,000 bond paying a 7% annual coupon and interest rates (for...

  1. An organization purchased a four-year $10,000 bond paying a 7% annual coupon and interest rates (for present value purposes are currently at 4%. This works out to a present value of the payment streams of $673.08 + $647.19 + $622.30 + $9,146.40 = $11,088.97, which is the market price of the bond. What is the duration of this bond?

  1. 2.75 years
  2. 3.65 years
  3. 3.75 years
  4. 4.0 years
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Answer #1

Solution:

Period (n) Present Value Present Value*n
1 673.08 673.08
2 647.19 1294.38
3 622.30 1866.90
4 9146.40 36585.60
Total 11088.97 40419.96

Duration of bond = Sum of (present Value*n) / Bond price = 40419.96 / 11088.97 = 3.65 years

Hence option "b" is correct.

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