1. Two bonds are available for purchase in the financial markets. The first bond is a two-year, $11,000 bond that pays an annual coupon of 10 %. The second bond is a two-year, $11,000, zero-coupon bond. (a) What is the duration of the coupon bond if the current yield-to-maturity (R) is 8 %? 10 %?12 %? Coupon bond: Par value = $11,000 Coupon rate = 10% Annual payments (b) How does the change in the current yield to maturity affect the duration of this coupon bond? (c) Calculate the duration of the zero-coupon bond with a yield to maturity of 8 %, 10 % and 12%.
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
1. Two bonds are available for purchase in the financial markets. The first bond is a two-year, $11,000 bond that pays an annual coupon of 10 %. The second bond is a two-year, $11,000, zero-coupon bond.
(a) What is the duration of the coupon bond if the current yield-to-maturity (R) is 8 %? 10 %?12 %?
Coupon bond: Par value = $11,000 Coupon rate = 10% Annual payments
(b) How does the change in the current yield to maturity affect the duration of this coupon bond?
(c) Calculate the duration of the zero-coupon bond with a yield to maturity of 8 %, 10 % and 12%.
(d) How does the change in the yield to maturity affect the duration of the zero-coupon bond?
(e) Why does the change in the yield to maturity affect the coupon bond differently to the way it affects the zero-coupon bond?
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