Homework Answers
27) d - Inverted as the yields decline with an increase in tenure.
28) b - Duration = 7.04
| Period (N) | Payment (P) | PVF | PVF x P x N | PVF x P |
| 1 | $80.00 | 0.90909 | $72.73 | $72.73 |
| 2 | $80.00 | 0.82645 | $132.23 | $66.12 |
| 3 | $80.00 | 0.75131 | $180.32 | $60.11 |
| 4 | $80.00 | 0.68301 | $218.56 | $54.64 |
| 5 | $80.00 | 0.62092 | $248.37 | $49.67 |
| 6 | $80.00 | 0.56447 | $270.95 | $45.16 |
| 7 | $80.00 | 0.51316 | $287.37 | $41.05 |
| 8 | $80.00 | 0.46651 | $298.56 | $37.32 |
| 9 | $80.00 | 0.42410 | $305.35 | $33.93 |
| 10 | $1,080.00 | 0.38554 | $4,163.87 | $416.39 |
| Sum | $6,178.31 | $877.11 | ||
| Duration | 7.04 |
First of all, let's calculate the yield to maturity of the bond using I/Y function on a calculator
N = 10, PMT = 8% x 1000 = 80, PV = -877.11, FV = 1000 => Compute I/Y = 10%
PVF = 1 / (1 + 10%)^N
Duration = Sum of PVF x P x N / Sum of PVF x P = 6,178.31 / 877.11 = 7.04
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