Question

bond X and bond Y. Bond X has a face value of $1,000 and 10 years to maturity and has just been issued at par. It bears the current market interest rate of 7% (i.e. this is the yield to maturity for this bond). Bond Y was issued 5 years ago when interest rates were much higher. Bond Y has face value of $1,000 and pays a 13% coupon rate. When issued, this bond had a 15-year, so today its remaining maturity is 10 years. Both bonds make annual coupon payments.

1. What is the price of Bond Y, given that market interest rates are 7%?

2. Calculate the duration for bond bonds (use Excel).

Answer 1

1. What is the price of Bond Y, given that market interest rates are 7%?
=13%*1000/7%*(1-1/1.07^10)+1000/1.07^10
=1421.414892

2. Calculate the duration for bond bonds (use Excel).
X=DURATION(DATE(2001,1,1),DATE(2011,1,1),7%,7%,1,1)=7.515232249
Y=DURATION(DATE(2006,1,1),DATE(2011,1,1),13%,7%,1,1)=4.086656968