A 3-year bond pays annual coupons at 5%. lts par value is $1000. If its yield to to maturity is 4%, what is its duration and modified duration, respectively? A) Duration =5 years and modified duration =4.6 years. B) Duration=3 years andmodified duration=3.2 years C) Duration =2.86years andmodifiedduration =2.75years. D) Duration =2.55 years and modified duration =1.95 year
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:
A 3-year bond pays annual coupons at 5%. lts par value is $1000. If its yield to to maturity is 4%, what is its duration and modified duration, respectively?
A) Duration =5 years and modified duration =4.6 years.
B) Duration=3 years andmodified duration=3.2 years
C) Duration =2.86years andmodifiedduration =2.75years.
D) Duration =2.55 years and modified duration =1.95 year
Macaulay Duration is calculated using the below formula.
Here, ti = time till cash flow
PVi = Present value of cash flow till time i
P = Bond’s current price
Refer to the excel for the calculations, in the year 3, total cash flow is the bond coupon of $50 plus face value of $1000, hence $1050.
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