Consider two bonds. Both bonds have 4 years to maturity, $1,000 paid at maturity, and their yield to maturity is currently 9%.

Bond A has a 9% coupon rate paid annually.

Bond B is a zero-coupon bond.

1) Calculate the duration of both bonds assuming a discount rate of 9% using spreadsheet 11.1 on page 339 of the textbook as a guide.

2) Which bond has a longer effective maturity?

3) Which bond is more sensitive to changes in market interest rates?

4) Assume you had discounted both bonds at a higher interest rate.

a) Would the duration of bond A be longer, shorter or the same? Why?

b) Would the duration of bond B be longer, shorter or the same? Why?