Compute the duration for Bond C and rank the bonds on the basis of their price...

3.8 Ratings (340 Votes)

Calculation of the duration for Bond C:

Year (t)	Cash Flow from coupon payments (8% of $1000)	Cash Flow from maturity amount	Total Cash Flow from coupon payments and maturity amount (CF)	Present value (PV) discounted at 8% of yield to maturity	PV *t
1	$80.0		$80.0	$74.07	$74.07
2	$80.0		$80.0	$68.59	$137.17
3	$80.0		$80.0	$63.51	$190.52
4	$80.0		$80.0	$58.80	$235.21
5	$80.0	$1,000.0	$1,080.0	$735.03	$3,675.15
sum				$1,000.00	$4,312.13
				Bond's Price?
			Duration = sum of (PV*t)/sum of PVs =	$4,312.13/$1,000	4.31	Years

Ranking of the bonds on the basis of their price volatility: Bonds with higher duration are more volatile

Bond Coupon Term Duration Ranking (High to low)

A 8% 10 years 7.25 1

B 12% 10 years 6.74 2

C 8% 5 years 4.31 3

The percentage change in the price of each bond when interest rates rise from 8 to 12 percent:

Bond Coupon Term Duration Ranking (High to low) % Change in Price

A 8% 10 years 7.25 1 22.60%

B 12% 10 years 6.74 2 21.16%

C 8% 5 years 4.31 3 14.42%

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