Question

Calculate the Duration and Modified Duration of each bond (already completed). Create a chart the shows both measures versus term to maturity. Does duration increase linearly with term? If not, what relationship do you see?

А 2 Settlement Date 3 Maturity Date 4 Coupon Rate 5 Market Price 6 Face Value 7 Required Return 8 Frequency Bond A 2/15/2017 8/15/2027 4.00% 975.00 1,000.00 4.35% 2.00 Bond B 2/15/2017 5/15/2037 6.25% 1,062.00 1,000.00 5.50% 2.00 Bond C 2/15/2017 6/15/2047 7.40% 1,103.00 1,000.00 6.50% 2.00 Bond A 970.75 Overvalued Bond B 1,090.81 Undervalued B ond C 1,118.44 Undervalued 10 2a 11 Intrinsic Value 12 Undervalued/Overvalued 13 14 2b/c 15 Current Yield 16 YTM Bond A 4.10% 4.30% Bond B 5.89% 5.73% Bond C 6.71% 6.61% 18 Bond A Bond C 19 2d 20 Duration 21 Modified Duration 8.64 8.46 Bond B 11.96 11.64 13.16 12.75

Answer 1

8.46 Bond A Bond B Bond C Term to Maturity(Years) Duration 10.5 20.25 30.33 Modified Duration 8.64 11.96 11.64 13.16 12.75 1316 DURATION MODIFIED DURATION 10.5 30.33 10.5 30.33 20.25 TERM TO MATURITY 20.25 TERM TO MATURITY

Above shown is the graph of Duration vs Term to Maturity and Modified Duration vs Term to Maturity. As we can see from the graph, both the measures are not increasing linearly with the term to maturity but rather follow a non-linear path.

Although both the measures are increasing with the increasing term to maturity.