Duration Answer

• Size of each coupon = 8%*1000 = 80

• Number of CFs = 2
• r = 12%

C 1  FV
P  1  
r  1  r T
 (1  r ) T

80  1  1000
P 1  2 
  932.398
12%  1  12%   (1  12%) 2

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 CFt
• Step 1: First calculate the weights
wt 
1  r t
P
80

w1 
1  12% 1  0.076607
932.398

1080

w2 
1  12%2  0.923393
932.398

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• Step 2: Calculate the D, duration
T
D   t * wt
t 1

 1 * w1  2 * w2
 1 * 0.076607   2 * (0.923393)
 1.923393

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 DP  Dr 
 D
P 1  r 

P is the bond price

• Ytm is the yield to maturity
• the change of bond price is DP
• the change of yield-to-maturity is Dytm
• D is the duration.
DP  Dr 
 D
P 1  r 
DP  1%  New Price - 923.398
 1.923393   -0.01717%  x100%
P 1  12%  923.398

The estimated price = 916.3858

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