Homework Answers
Note A
Price is determined by
Outflow = Present flow of Inflow
= 1000/(1.008) i.e. $992.06
Duration for zero coupon pond = Maturity i.e. 1 year
MODDUR =Duration/(1+ytm) i.e. 1/1.008 i.e.0.99%
Note B
| Year (x) | Cash Flow | Discounting Factor@1% | Present Value(w) | w*x |
| 1 | 5 | 0.9900990099 | 4.9505 | 4.9505 |
| 2 | 1005 | 0.9802960494 | 985.197 | 1970.3951 |
| 990.1475 | 1975.3456 |
Price= Present value of cash inflow i.e $990.1475
Duration =sum of wx/sum of w i.e. 1975.345/990.1475 i.e.1.995
MODDUR =Duration/(1+ytm) i.e. 1.995/(1.01) i.e.1.975%
Note C
| Year (x) | Cash Flow | Discounting [email protected]% | Present Value(w) | w*x |
| 1 | 10 | 0.989119 | 9.89119 | 9.89119 |
| 2 | 10 | 0.978357 | 9.78357 | 19.56714 |
| 3 | 1010 | 0.967712 | 977.38912 | 2932.16736 |
| 997.06388 | 2961.62569 |
Price = Present value of cash flow i.e. 997.06388
Duration =2961.62569/997.06388 i.e.2.970347
MODDUR=2.970347/1.011 i.e. 2.93802%
Note D
| Year (x) | Cash Flow | Discounting [email protected]% | Present Value(w) | w*x |
| 1 | 15 | 0.988142292 | 14.82213 | 14.82213 |
| 2 | 15 | 0.97642519 | 14.64638 | 29.29276 |
| 3 | 15 | 0.964847026 | 14.47271 | 43.41812 |
| 4 | 1015 | 0.953406152 | 967.7072 | 3870.829 |
| 1011.648 | 3958.362 |
Price = 1011.648
Duration =3958.362/1011.648 i.e. 3.912784
MODDUR =3.912784/1.012 i.e 3.866387%
Note E
| Year (x) | Cash Flow | Discounting [email protected]% | Present Value(w) | w*x |
| 1 | 20 | 0.985221675 | 19.70443 | 19.70443 |
| 2 | 20 | 0.970661749 | 19.41323 | 38.82647 |
| 3 | 20 | 0.956316994 | 19.12634 | 57.37902 |
| 4 | 20 | 0.94218423 | 18.84368 | 75.37474 |
| 5 | 1020 | 0.928260325 | 946.8255 | 4734.128 |
| 1023.913 | 4925.412 |
Price =1023.913
Duartion =4925.412/1023.913 i.e.4.810381
MODDUR =4.810381/1.015 i.e.4.739291%
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Please answer if you know ALL the parts (a-c) correctly, neatly
and in detail.
2. Lower back pain is a common complaint that is hard to treat effectively. Does regular physical therapy help? A randomized experiment assigned patients visiting their doctor for lower back pain to two groups: 142 received an examination and advice from a physical therapist; another 144 received regular physical therapy for up to five weeks. After a year the change in their level of disability (0%...
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