Consider the sale of a bond at a face value of US$1,000, with six years to maturity and a coupon

Question:

Consider the sale of a bond at a face value of US$1,000, with six years to maturity and a coupon rate of 7% per year.

Required:

i) Calculate the duration of the bond. (4 points)

ii) What is the modified duration of the bond? (3 points)

iii) If the yield to maturity of the bond increases to 8%, what happens?

to the duration of the bonds? Why does this change occur? (4 points)

iv) Why must the duration of a coupon bond always be less

than the time to its maturity date? (3 points)

Expert Answer:

Answer rating: 100% (QA)

i Duration of the Bond To calculate the duration of the bond we need to consider the time weighted present value of all cash flows In this case the bo

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