You are expecting a cash-outflow for a payment due in 1 year and 325 days from now,

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You are expecting a cash-outflow for a payment due in 1 year and 325 days from now, and you are looking for an investment allowing you to get "immunized" against fluctuations in the yields. The yield curve is flat at the level of 13%. You are given the choice between the following two bonds:

i) A bond with a coupon rate of 14%, yearly interest payments, and principal due in 2 years.

ii) A bond with a coupon rate of 12%, yearly interest payments, and principal due in 2 years.

What is the duration of each bond, at the given level of the yields, and which one of them should you invest in, given your objective? (In order to fix ideas, when you calculate the duration of the bonds, you can assume that the face-value of each one of them is equal to $1000).

Posted Date: Sep 26, 2021 12:01 PM

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You are expecting a cash-outflow for a payment due in 1 year and 325 days from now,

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1 period interest payment141000 periodinterest PVF14nyeras Present value 1 140 140 ... View the full answer

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