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 Summary
The solution helps understands how the interest rate risk would vary with the different features of bonds.
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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) "
Duration of Bond = summation [t*CFt/(1+y)^t] ...
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