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Preference of Bond and Justification

Consider the following bonds:
a. [7] What is the duration of a five-year bond with a 6.5 percent semiannual coupon if the yield to maturity (ytm) is 7.125%?

b. [3] What is the duration of a 20-year zero coupon bond with a yield to maturity of 7.625%

c. [2] You expect a sudden, but widely unanticipated, increase in the market rates of interest due to a change in position by the Federal Reserve. Would you rather be holding in your asset portfolio the bond from a. above (BOND A) or the zero from b. above (BOND B)? Which bond would you prefer, and why?

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"Consider the following bonds:
a. What is the duration of a five-year bond with a 6.5 percent semiannual coupon if the yield to maturity (ytm) is 7.125%?
"
The cash flow are
Coupon Rate 6.5%
Coupon payable Semi-Annual 2
Time to maturity 5 Years
Yield to Maturity 7.125%
Face Value of Bond $1,000

Cash Flows
t CFt t*CFt

1 $32.50 $32.50
2 $32.50 $65.00
3 $32.50 $97.50 ...

Solution Summary

This post shows how to determine the duration of a bond with step-by-step calculations in excel format.

$2.19