Calculate durations and modified durations for the 3% bonds in Table 3.2. You can follow the procedure
Question:
Calculate durations and modified durations for the 3% bonds in Table 3.2. You can follow the procedure set out in Table 3.4 for the 9% coupon bonds. Confirm that modified duration closely predicts the impact of a 1% change in interest rates on the bond prices.
TABLE 3.2
Cash Payments ($) Price ($) $939.98 1,300.10 Year 1 $30 90 Year 2. Coupon 3% 9% $30 90 Year 6 $30 90 Year 7 $1,030 1,090
Step by Step Answer:
Given data Input variables Coupon rate 03 Price 939...View the full answer
Principles of Corporate Finance
ISBN: 978-1259144387
12th edition
Authors: Richard Brealey, Stewart Myers, Franklin Allen
Related Video
Bond valuation is the process of determining the worth of a bond. It is based on the present value of the bond\'s future cash flows, which include coupon payments and the return of the bond\'s face value (or \"principal\") at maturity. The discount rate used in the calculation is directly tied to prevailing interest rates, and a rise in interest rates will decrease the present value of the bond and thus lower its price. Conversely, a fall in interest rates will increase the present value of the bond and raise its price. Interest rates serve as a benchmark for determining the value of a bond, as they determine the discount rate used in the bond valuation calculation. The most commonly used measure of interest rates is the yield to maturity (YTM), which represents the internal rate of return of an investment in a bond if the investor holds the bond until maturity and receives all scheduled payments. Yield to maturity is a function of the coupon rate, the current market price of the bond, the face value of the bond, and the number of years remaining until maturity. By comparing the yield to maturity of a bond to prevailing market interest rates, an investor can assess the relative value of the bond.
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