Question on bond pricing
Excuse my naivete, but I have a simple bond math question. I was asked to calculate the duration for a 10 year bond at 12%, with a refinance at year 5 at par, and 20% amortization.
I started by discounting the coupon (12) for years 1-4 and coupon+principal (112) for year 5. I used the excel pmt function (PMT (12, 5, -100, 0, 0)) to find the annual payments and discounted accordingly. So essentially I viewed this as 2 5-year bonds. Does this make sense to you? This yields a Mac duration of ~5.1, compared to a duration of ~6.1 for a 10 year bond at 12% with no refi.
Any insight would be greatly appreciated.
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