Bond A Bond B Time to maturity (years) 5 6 Annual yield to maturity 4.00% 4.00% Annual coupon payment 40.00 65.94 Current price -1000 -1000 Face value 1000 826.02 So we start...

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Finance

Bond A Bond B
Time to maturity (years) 5 6
Annual yield to maturity 4.00% 4.00%
Annual coupon payment 40.00 65.94
Current price -1000 -1000
Face value 1000 826.02
So we start with twobonds of equal price ($1000) and annual yield to maturity(4.00%)
a)What is the Macaulayduration (in years) for Bond A and B?
b) Assume annual yieldto maturity drops from 4.00% to 3.00%. What is the total endingwealth of Bond A and B?

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3.9 Ratings (495 Votes)

a Bond A Year t Payments P PV of Payments P14t PV x t 1 40 3846 3846 2 40 3698 7396 3 40 3556 10668 4 40 3419 13677 5 1040 85480 427402 Total 100000 462990 See Answer

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Transcribed Image Text

Bond ABond BTime to maturity (years)56Annual yield to maturity4.00%4.00%Annual coupon payment40.0065.94Current price-1000-1000Face value1000826.02So we start with twobonds of equal price ($1000) and annual yield to maturity(4.00%)a)What is the Macaulayduration (in years) for Bond A and B?b) Assume annual yieldto maturity drops from 4.00% to 3.00%. What is the total endingwealth of Bond A and B?

Bond A	Bond B
Time to maturity (years)	5	6
Annual yield to maturity	4.00%	4.00%
Annual coupon payment	40.00	65.94
Current price	-1000	-1000
Face value	1000	826.02