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Quiz 1 Hasnat Khaliq BAF 173005: Answer

This document contains the solutions to several questions about calculating duration for coupon bonds and zero-coupon bonds. For a coupon bond, increasing the yield-to-maturity decreases the duration. For a zero-coupon bond, changing the yield-to-maturity does not affect the duration, which remains at 2. While changing yields affects coupon bonds by allowing for higher reinvestment income, it does not impact zero-coupon bonds since they have no interim cash flows.

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Hamza Khaliq
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49 views3 pages

Quiz 1 Hasnat Khaliq BAF 173005: Answer

This document contains the solutions to several questions about calculating duration for coupon bonds and zero-coupon bonds. For a coupon bond, increasing the yield-to-maturity decreases the duration. For a zero-coupon bond, changing the yield-to-maturity does not affect the duration, which remains at 2. While changing yields affects coupon bonds by allowing for higher reinvestment income, it does not impact zero-coupon bonds since they have no interim cash flows.

Uploaded by

Hamza Khaliq
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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QUIZ 1

HASNAT KHALIQ
BAF 173005
QUESTION 1
ANSWER

Coupon Bond
Par value = $1,000 Coupon = 0.10 Annual payments
YTM = 0.08 Maturity = 2
Time Cash Flow PVIF PV of CF PV*CF*T
1 $100.00 0.92593 $92.59 $92.59

2 $1,100.00 0.85734 $943.07 $1,886.15

Price = $1,035.67
Numerator = $1,978.74 Duration = 1.9106 = Numerator/Price

YTM = 0.10
Time Cash Flow PVIF PV of CF PV*CF*T
1 $100.00 0.90909 $90.91 $90.91

2 $1,100.00 0.82645 $909.09 $1,818.18

Price = $1,000.00
Numerator = $1,909.09 Duration = 1.9091 = Numerator/Price

YTM = 0.12
Time Cash Flow PVIF PV of CF PV*CF*T
1 $100.00 0.89286 $89.29 $89.29
2 $1,100.00 0.79719 $876.91 $1,753.83

Price = $966.20
Numerator = $1,843.11 Duration = 1.9076 = Numerator/Price

ANSWER (b) Part

If we Increase the yield-to-maturity it will decrease the duration of the bond

ANSWER (C) Part


Zero Coupon Bond
Par value = $1,000 Coupon = 0.00
YTM = 0.08 Maturity = 2
Time Cash Flow PVIF PV of CF PV*CF*T
1 $0.00 0.92593 $0.00 $0.00
2 $1,000.00 0.85734 $857.34 $1,714.68

Price = $857.34
Numerator = $1,714.68 Duration = 2.0000 = Numerator/Price

YTM = 0.10
Time Cash Flow PVIF PV of CF PV*CF*T
1 $0.00 0.90909 $0.00 $0.00
2 $1,000.00 0.82645 $826.45 $1,652.89

Price = $826.45
Numerator = $1,652.89 Duration = 2.0000 = Numerator/Price
YTM = 0.12
Time Cash Flow PVIF PV of CF PV*CF*T
1 $0.00 0.89286 $0.00 $0.00
2 $1,000.00 0.79719 $797.19 $1,594.39

Price = $797.19
Numerator = $1,594.39 Duration = 2.0000 = Numerator/Price

ANSWER no (d) Part


Changing the yield-to-maturity does not affect the duration of the zero coupon bond.

ANSWER no (e) part


Increasing the yield-to-maturity on the coupon bond allows for a higher reinvestment income
that more quickly recovers the initial investment. The zero-coupon bond has no cash flow until
maturity.

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