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# Duration of a 3-year Bond

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What is the duration of a bond with three years to maturity and a coupon of 6 percent paid annually if the bond sells at par? (Round your answer to 5 decimal places. (e.g., 32.16161)

#### Solution Preview

Dear Student:

Duration measures how sensitive the bond is to changes in the market interest rate.

The formula for duration and the calculations are in the attached word file in a clear form.

D=(C[((1+r)^(N+1)-(1+r)-R*N)/(r^2 (1+r)^N )]+ (F*N)/(1+r)^N )/P_o

Where C ...

#### Solution Summary

This solution shows the calculation of duration for a 3-year bond for a bond selling at par, using the duration formula.

\$2.19

## Bonds - Holding Period Yield

Your boss has again asked for your help. He needs to figure out the holding period yield on a candidate bond for inclusion in a pension bond portfolio and whether your company should purchase it. He has left a note on your desk:
We are considering purchasing a 7% percent coupon bond (coupons paid semiannually) with 14 years remaining to maturity for 104-25 (priced in 32nds). We can re-invest the coupon payments at 4% percent, and we expect to sell the bond after a 3-year holding period for 105-13 (priced in 32nds).

Thank you,

Provide:
1. The future value of the annuity from the re-invested coupons.
2. The holding period yield for the 3-year investment horizon.
3. Your recommendation as to whether the company should purchase the candidate bond if your required return is 6%.

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