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    Bond Payout Schedule

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    You are given two bonds (Bond A & Bond B) which have different payment schedule. Based on the following information, you wish to figure out which bond has a greater interest rate risk. (You need to calculate duration and volatility of bonds)
    o Bond A: 2 year discounted bond with face value of $1000.
    o Bond B: 2 year coupon bond (annual coupon rate = 5%) with face value of $1,000
    o Assume 6% of appropriate discount rate (Annual yield).

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    Solution Preview

    See the attached file.

    "You are given two bonds (Bond A & Bond B) which have different payment schedule. Based on the following information, you wish to figure out which bond has a greater interest rate risk. (You need to calculate duration and volatility of bonds)
    o Bond A: 2 year discounted bond with face value of $1000.
    o Bond B: 2 year coupon bond (annual coupon rate = 5%) with face value of $1,000
    o Assume 6% of appropriate discount rate (Annual yield) "

    Duration of Bond = summation [t*CFt/(1+y)^t] ...

    Solution Summary

    The solution helps understands how the interest rate risk would vary with the different features of bonds.

    $2.19

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