Question

Problem 13-03 The Clarence Corporation has issued bonds that pay semiannually with the following characteristics: Coupon Yield to Maturity Maturity Macaulay Duration 10% 10% 13 7.55 years a. Calculate modified duration using the information provided. Do not round intermediate calculations. Round your answer to two decimal places. Use only the data provided in the table above (in the problem statement) for your calculations. years b. What is a better measure when calculating the bond's sensitivity to changes in interest rates? -Select- -Select- considers only the final cash flow, while is a better measure of the bond's sensitivity to changes in interest rates as A includes other factors. -Select- c. Identify the direction of change in modified duration if: 1. the coupon of the bond were 8%, not 10%. Modified duration -Select- as the coupon decreases. 2. the maturity of the bond were 7 years, not 13 years. Modified duration -Select- as maturity decreases.

Answer 1

a) Modified Duration = Macaulay Duration/ (1+ YTM/n)

where n is the frequency of coupon payment, for Semiannual coupon , n= 2

So, Modified Duration = 7.55 years / (1+10%/2) = 7.19 years

b) Modified Duration is a better measure when calculating the bond's sensitivity to change in interest rates as maturity considers on the final cashflow while Modified Duration includes other factors

c)

1. if the coupon of the bond were 8% , not 10% , the bond's Modified Duration increases as the coupon decreases

2 If the maturity of the bond were 7 years , not 13 years , the bond's Modified Duration decreases as the maturity decreases