You have an obligation to pay $1,488 in four years and two months.In which bond would you invest your $1,000 to accumulate this amount, with relative certainty, even if the yield on the bond declines to 9.5% immediately after you purchase the bond

Question

Quizplus · Accepted Answer

When duration = horizon date, one is immunized, or protected, against one interest rate change.The zero has D = 5.Since the other bonds have the same coupon and yield, solve for the closest value of T that gives D = 4.17 years.4.17 = (1.10)/.10 - [(1.10) + T(.10 - .10)] = 1.1; .68 (1.10) T - .68 + .68 = 1.1; .68 (1.10) T = 1.1; (1.10) T = 1.6176; T [ln (1.10)] = ln (1.6176); T = 5.05 years, so choose the 5-year 10% coupon bond.

You Have an Obligation to Pay $1,488 in Four Years