Two bonds are available for purchase in the financial markets. The first bond is a two-year, $

Question:

Two bonds are available for purchase in the financial markets. The first bond is a two-year, $ 1,000 bond that pays an annual coupon of 10 percent. The second bond is a two- year, $ 1,000, zero-coupon bond.

a. What is the duration of the coupon bond if the current yield to maturity is 8 percent? 10 percent? 12 percent?

b. How does the change in the current yield to maturity affect the duration of this coupon bond?

c. Calculate the duration of the zero-coupon bond with a yield to maturity of 8 percent, 10 percent, and 12 percent.

d. How does the change in the yield to maturity affect the duration of the zero- coupon bond?

e. Why does the change in the yield to maturity affect the coupon bond differently than it affects the zero-coupon bond?

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...