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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 ABond B
Time to maturity (years)56
Annual yield to maturity4.00%4.00%
Annual coupon payment40.0065.94
Current price-1000-1000
Face value1000826.02

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?

Answer & Explanation Solved by verified expert
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?

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