What is the effective duration for a 7-year USD bond issued by ABC, a coupon of...
What is the effective duration for a 7-year USD bond issued by ABC, a coupon of 3% (semiannual) priced @ 1.90%. Shock annual yields +/- 1%? Use par value of $100
Homework Answers
The formula for macaulay's duration is as below
| Cash Flow # (f) | Cash Flow (CF) | PV of Cash Flow (CF/ ((1+r/2)^f) | PV/ Total*tf |
| 1 | 1.5 | 1.5 | 0.0 |
| 2 | 1.5 | 1.5 | 0.0 |
| 3 | 1.5 | 1.5 | 0.0 |
| 4 | 1.5 | 1.4 | 0.0 |
| 5 | 1.5 | 1.4 | 0.0 |
| 6 | 1.5 | 1.4 | 0.0 |
| 7 | 1.5 | 1.4 | 0.0 |
| 8 | 1.5 | 1.4 | 0.1 |
| 9 | 1.5 | 1.4 | 0.1 |
| 10 | 1.5 | 1.4 | 0.1 |
| 11 | 1.5 | 1.4 | 0.1 |
| 12 | 1.5 | 1.3 | 0.1 |
| 13 | 1.5 | 1.3 | 0.1 |
| 14 | 101.5 | 88.9 | 5.8 |
| Total | 107.2 |
6.4 |
Answer: Duration is 6.4 i.e. for every 1% change in interest, the bond price changes by 6.4%
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