How do you find the duration of a zero coupon bond?
How do you find the duration of a zero coupon bond?
Given its relative ability to predict price changes based on changes in interest rates, duration allows for the effective comparison of bonds with different maturities and coupon rates. For example, a 5-year zero coupon bond may be more sensitive to interest rate changes than a 7-year bond with a 6% coupon.
What is the duration of a 30 year zero coupon bond?
30 years
A 30 year zero has a duration of 30 years. Keeping in mind the rule of thumb that the percentage price change of a bond roughly equals its duration times the change in interest rates, one can begin to see how much more volatile a zero can be than a coupon bond.
How do you calculate the duration of a coupon bond?
The formula for the duration is a measure of a bond’s sensitivity to changes in the interest rate, and it is calculated by dividing the sum product of discounted future cash inflow of the bond and a corresponding number of years by a sum of the discounted future cash inflow.
What is the duration of a two year zero coupon bond?
Answer: a) Year Cash Flow PV of Cash flow PV of CF * t 1 100 89.29 89.29 2 1100 876.91 1753.83 966.20 1843.11 Duration = 1843.11/966.20 = 1.90 b) Duration of a zero coupon bond is alwaysequal to its maturity. Thus in this case, the duration is equal to 2 years.
What is the duration of a zero coupon bond explain with example?
Zero coupon bonds may be long or short-term investments. Long-term zero coupon maturity dates typically start at ten to fifteen years. The bonds can be held until maturity or sold on secondary bond markets. Short-term zero coupon bonds generally have maturities of less than one year and are called bills.
What is the duration of 3 year zero coupon bond?
Zero-coupon bonds are popular (in exams) due to their computational convenience. We barely need a calculator to find the modified duration of this 3-year, zero-coupon bond. Its Macaulay duration is 3.0 years such that its modified duration is 2.941 = 3.0/(1+0.04/2) under semi-annually compounded yield of 4.0%.
How do you find the Macaulay duration of a zero coupon bond?
The Formula for Macaulay Duration The computation of Macaulay duration can be complicated and has a number of variations, but the primary version is calculated by adding up the coupon payment per period, multiplied by the time to maturity, divided by 1, plus the yield per period raised to the time to maturity.
How do you calculate portfolio duration?
Portfolio duration is commonly estimated as the market-value-weighted average of the yield durations of the individual bonds in the portfolio. The total market value of the bond portfolio is 170,000 + 850,000 + 180,000 = 1,200,000.
How do you calculate Macaulay duration of a zero coupon bond?
How do you calculate a zero coupon bond?
Zero coupon bond yield is calculated by using the present value equation and solving it for the discount rate. The resulting rate is the yield. It is both the discount rate that is revealed by the market situation and the return rate that investors expect from the bond.
What is the duration of a zero coupon bond?
Zero coupon bond can be of any duration , can be from one year to 10 years. It is ordinarily from 3 to 5 years. Zero coupon bonds are issued at a discount with par value paid on redemption, sometimes with a nominal premium.
What is a 10 year zero coupon bond?
A zero-coupon bond that is a long-term investment generally has a maturity date that starts around 10 to 15 years. Zero-coupon bonds that are considered short-term investments typically have a maturity that is no more than one year.
What is an example of a zero coupon bond?
When the bond reaches maturity, its investor receives its par (or face) value. Examples of zero-coupon bonds include U.S. Treasury bills, U.S. savings bonds, long-term zero-coupon bonds, and any type of coupon bond that has been stripped of its coupons.
