For the following question, would you say 1.5 minutes is enough for all the required calculations? A non-callable bond with 18 years remaining maturity has an annual coupon of 7% and a $1,000 par value. The current yield to maturity on the bond is 8%. Which of the following is closest to the effective duration of the bond? A) 8.24. B) 11.89. C) 9.63. Give it a try.
use bond function on your calc. (if you do not know how, learn it) 2nd bond SDT=1.0100 CPN=7 RDT=1.0118 RV=100 ACT 1/Y => needs to be changed YLD=8 PRI=90.628 (when you hit compute) Two down arrows later -> DUR -> CPT -> 9.63 , 30 secs - ans = 9.63
To CP:It’s applicable for BAII Pro only. Trang
Thanks for the calculator tip CP. Calculating three bond prices and then computing the effective duration formula will definitely rob time.
you can use the tvm fns as well quickyl 18 N, 8=I/Y PMT=70 FV=1000 CPT PV=-906.28 7.5=I/Y CPT PV=951.46 8.5=I/Y CPT PV=864.16 Duration = (951.46-864.16)/(2*906.28*0.005) = 9.63
Very smart, thanks CP Trang