You have constructed a table to calculate the duration of 2 year coupon paying bonds issued by Earth Bank at a yield of 3% pa compounded half-yearly. The bonds have a face value of $190,000 and a coupon rate of 5% pa compounded half-yearly. You printed up the table so that you could take it to a meeting, but unfortunately the final row has been cut off the printout.
a)Complete the table. Give your answers as decimals to 4 decimal places.
| Cash flow | Amount ($) |
Present value of the cash flow (PVCF) |
Weight (PVCF/price) |
|---|---|---|---|
| 1 | 4,750 | 4,679.8030 | 0.0237 |
| 2 | 4,750 | 4,610.6433 | 0.0234 |
| 3 | 4,750 | 4,542.5057 | 0.0230 |
| 4 |
b)Calculate the duration (D) of the Earth Bank bonds using the rounded values in the table. Give your answer in years to 2 decimal places.
D = years
c)If the yield were to decrease immediately, the duration of the bonds would:
increase
decrease
remain unchanged
A portfolio consists of the following two investments:
The portfolio is comprised of 36% bonds and 64% annuities.
The term structure is flat and the current yield is 8% pa effective.
Calculate the duration (D) of the portfolio. Give your answer to 2 decimal places.
D = years
A financial instrument provides three future cash flows:
Calculate the duration (D) of the financial instrument at a yield of 6% pa compounded yearly. Give your answer in years to 2 decimal places.
D = years
