Question

QUESTION 27 Assume that the 1, 2, 3, 5, 10, 20, and 30-year rates were 7%, 6.5 %, 6 6 , 5.4 % , 5.2 % , 5.0 % , and 4.8 %, respectively. What type of yield curve is this? a. Humped. b. Normal. c. Flat d. Inverted.

Answer 1

27) d - Inverted as the yields decline with an increase in tenure.

28) b - Duration = 7.04

Period (N)	Payment (P)	PVF	PVF x P x N	PVF x P
1	$80.00	0.90909	$72.73	$72.73
2	$80.00	0.82645	$132.23	$66.12
3	$80.00	0.75131	$180.32	$60.11
4	$80.00	0.68301	$218.56	$54.64
5	$80.00	0.62092	$248.37	$49.67
6	$80.00	0.56447	$270.95	$45.16
7	$80.00	0.51316	$287.37	$41.05
8	$80.00	0.46651	$298.56	$37.32
9	$80.00	0.42410	$305.35	$33.93
10	$1,080.00	0.38554	$4,163.87	$416.39
		Sum	$6,178.31	$877.11
		Duration	7.04

First of all, let's calculate the yield to maturity of the bond using I/Y function on a calculator

N = 10, PMT = 8% x 1000 = 80, PV = -877.11, FV = 1000 => Compute I/Y = 10%

PVF = 1 / (1 + 10%)^N

Duration = Sum of PVF x P x N / Sum of PVF x P = 6,178.31 / 877.11 = 7.04