A fund manager holds a bond which pays $10 in one year, $15 in two years, $15 in three 

years and $120 in four years from now. The current interest rate i for this bond is 5%.

What is the duration of the bond?

B.

Assume that the interest rate i rises to 5.5%. What is the change of the equilibrium bond

price (in $) in that case if you use the bond's duration to calculate the price change?

C.

Assume you are the manager of a large pension fund. For some reason, you have private

information and know that the interest rate will increase in the (near) future. Would you

purchase a bond with short or long duration in this situation? Briefly explain your

answer.

Answer rating: 100% (QA)

To provide accurate calculations we need precise values for the bond payments Lets assume the bond p... View the full answer