Question

(10 Marks) 30. Calculate the duration of the following debt security and discuss how duration changes with YTM, maturity, coupon rate and face value This debt security has a coupon rate of 5% payable semiannually, YTM is 7% per annum, face value of £1,000 and two years to maturity (10 Marks) END OF EXAMINATION PAPER

question 30 help please

Answer 1

Duration of a security is calculated in the filling manner:

Calculating the cash inflow per year and multiplying by the respective no. Of year = weighted average cash inflow. Calculating the present value of weugjred cash inflow and it's dum is divided by value of bond.

Period. Cash inflow .weighted average inflow present value @3.5%

1 50 . 50 . 0.966

2 . 50 . 100 . 0.934

3 . 50 . 150 . 0.902

4. 50 . 200 . 0.871

Sum of present value of cash inflows = 48.3 + 93.4 + 135.3 + 174.2

= 451.2

Duration = 451.2 / 1000

= 0.45 years