The goal is to show that the rate risk in bonds depends on time to maturity and on size of coupons.  Consider the following 4 US Treasury bonds (par value $100):

Bond A is a 2.5-year bond with a 5% coupon rate. 

Bond B is a 30-year bond with a 5% coupon rate.

Bond C is a 2.5-year bond with a 10% coupon rate. 

Bond D is a 30-year bond with a 10% coupon rate. 

Assume that all   bonds pay semi-annual coupons  (ie, bond that has a 4% coupon, pays 2% every 6 months) and are trading at a 7% yield ( with semi-annual compounding)  . Calculate duration of   bonds  A , B, C and D  and explain differences in their durations 

Answer rating: 100% (QA)

The duration of a bond is a measure of its sensitivity to changes in interest rates It considers the size and timing of all cash flows including coupo... View the full answer