You find a bond with 21 years until maturity that has a coupon rate of 8.4 percent and a yield to...

Question:

You find a bond with 21 years until maturity that has a coupon rate of 8.4 percent and a yield to maturity of 11 percent. What is the

a) Macaulay duration?

b) Modified duration?

Bond Duration:

The duration of a bond measures the sensitivity of bond value with respect to changes in interest rates. Specifically, the duration of a bond is the percentage change in bond price given a one percentage point change in interest rate. The longer the duration, the higher the interest rate risk.

Answer and Explanation:

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a) The duration is 9.36

We can use the following formula to compute the Macaulay duration:

  • {eq}\displaystyle \frac{\sum_{t=1}^T{\frac{tC}{(1 + y)^t}...

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Learn more about this topic:

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Interest Rate Risk: Definition, Formula & Models

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Chapter 3 / Lesson 6
11K

Interest rate risk is really the risk of two different events (price reduction and reinvestment rate reduction) caused by a change in interest rates. Interest rate risk affects bond investments, but the good news for bond investors is that it can be mitigated or eliminated.


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