A 4-year coupon bond has payments as follows: Bond Cash Flow Year 1 £5 Year 2 £5 Year 3 £5 Year 4 £105 The 5% coupon bond is currently trading at par (£100). Compute the duration of the bond. How much do you expect this bond’s price to rise if the yield increases by 1 percent?

A 4-year coupon bond has payments as follows: Bond Cash Flow Year 1 £5 Year 2 £5 Year 3 £5 Year 4 £105 The 5% coupon bond is currently trading at par (£100). Compute the duration of the bond. How much do you expect this bond’s price to rise if the yield increases by 1 percent?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 4MC

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Question

A 4-year coupon bond has payments as follows:

Bond Cash Flow

Year 1 £5

Year 2 £5

Year 3 £5

Year 4 £105

The 5% coupon bond is currently trading at par (£100). Compute the duration of the bond. How much do you expect this bond’s price to rise if the yield increases by 1 percent?

Definition Definition Calculates the present value of a bond's expected future periodic coupon payments. Bond valuation determines the theoretical fair value of a particular bond and helps investors estimate what rate of return they could expect. The bond's theoretical fair value is computed by discounting the future cash flows or coupon payments by an applicable discount rate.

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