You are trying to compare the interest rate risks of two bonds: (i) a 15year 8%...
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You are trying to compare the interest rate risks of two bonds: (i) a 15year 8% bond, and (ii) a 10year 6% bond. Both bonds pay semiannual interest payments. The current market interest rate for the 15year bond is 7.2% and the market interest rate for the 10year bond is 5.8%. a. Determine the (Macaulay) durations of the two bonds. b. Based on your findings in (a) and (b), which bond has a greater interest rate risk? Explain. You have two bonds: Bond A and Bond B are both 10year bonds with semiannual payments (and pars of $1,000). For Bond A, the coupon rate is 6% for the first 5 years and 8% for the next 5 years; whereas for Bond B, the coupon rate is 8% for the first 5 years and 6% for the next 5 years. The current market interest rate is 7%. a. Determine the intrinsic values of the two bonds. b. Determine the (Macaulay) durations of the two bonds. C. Discuss how the coupon rates affect the durations of the bonds.
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a The Macaulay duration of a bond is a measure of its interest rate risk It is calculated as the wei... View the full answer
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