Calculate the duration of a two-year corporate bond paying 6 percent interest annually,selling at par.Principal of $20,000,000 is due at the end of two years.

Question

Quizplus · Accepted Answer

The bond is paying 6% interest annually, which means the bondholder will receive $1,200,000 ($20,000,000 x 6%) every year for two years. At the end of the two years, the principal of $20,000,000 will also be paid back. Therefore, the total cash inflow over the two years will be $1,200,000 x 2 + $20,000,000 = $22,400,000. 
To calculate the duration, we need to discount this total cash inflow at the yield rate. Since the bond is selling at par (i.e., its yield rate is 6%), we can discount the cash inflows at 6%. 
$22,400,000 / (1 + 0.06) + $22,400,000 / (1 + 0.06)^2 = $38,400,000 
Therefore, the duration is: 
($22,400,000 x 1 / $38,400,000 x 1) + ($22,400,000 x 2 / $38,400,000 x 1.06^2) = 1.94 years.

Calculate the Duration of a Two-Year Corporate Bond Paying 6