There are two riskless bonds which mature at t = 2. The first is a zero coupon
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Question:
(i) What is the duration of the zero coupon bond? And of the coupon bond? Explain its economic meaning.
(ii) Suppose the interest rate at t = 1 is 8%. Find the percentage price change for the zero coupon bond. Suppose next the interest rate at t=1 is 12%: find again the percentage change for the coupon bond. Compare the findings obtained in the two cases and explain them.
(iii) Compute then the percentage change for the coupon bond when the interest rate at t = 1 is 8% and then when it is 12%. Compare with the result obtained in the previous point (ii) and discuss.
Related Book For
Financial Accounting
ISBN: 9781264229734
11th Edition
Authors: Robert Libby, Patricia Libby, Frank Hodge
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