Two bonds are available for purchase in the financial markets.  The first bond is a 2-year, 

$1,000 bond that pays an annual coupon of 10 percent.  The second bond is a 2-year, 

$1,000, zero-coupon bond. 

 

  a.  What is the duration of the coupon bond if the current yield-to-maturity (YTM) is 8 

percent? 10 percent?  12 percent?  (Hint: You may wish to create a spreadsheet 

program to assist in the calculations.)

b.  How does the change in the current YTM affect the duration of this coupon bond? 

c.  Calculate the duration of the zero-coupon bond with a YTM of 8 percent, 10 percent, 

and 12 percent.

d.  How does the change in the current YTM affect the duration of the zero-coupon bond?

e.  Why does the change in the YTM affect the coupon bond differently than the zero-

coupon bond?