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There are two riskless bonds which mature at t = 2.The first is a zero coupon bond that pays a balloon of $ 1,200.The other is a coupon bond with an annual coupon of $100 and a balloon payment of $990.The current yield on a riskless bond that mature in one year is 10%, the annualized yield on a two-year bond is also 10%.
-What is the duration of each bond Answer: zero coupon, coupon)?
A)1 year, 1.512 years
B)1.512 years, 2 years
C)1.512 years, 1.908 years
D)2 years, 1.908 years
E)2 years, 1.512 years

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There are two riskless bonds which mature at t = 2.The first is a zero coupon bond that pays a balloon of $ 1,200.The other is a coupon bond with an annual coupon of $100 and a balloon payment of $990.The current yield on a riskless bond that mature in one year is 10%, the annualized yield on a two-year bond is also 10%.
-What is the duration of each bond Answer: zero coupon, coupon)?
A)1 year, 1.512 years
B)1.512 years, 2 years
C)1.512 years, 1.908 years
D)2 years, 1.908 years
E)2 years, 1.512 years

Quizplus · Accepted Answer

The duration of a zero-coupon bond is equal to its time to maturity, which is 2 years in this case. For the coupon bond, the duration is calculated based on the present value of its cash flows (coupons and balloon payment) discounted at the yield rate. Given the yield is 10%, the duration of the coupon bond is calculated to be shorter than its maturity due to the coupon payments, resulting in 1.908 years.

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