Duration problems

Created by Pamela Peterson Drake

Problem 1
Consider a bond that has a coupon rate of 5%, five years to maturity, and is currently priced to yield 6%.
Calculate the following:
 Macauley duration
 Modified duration
 Effective duration
 Percentage change in price for a 1% increase in the yield to maturity

Problem 2
Consider a bond that has a coupon rate of 7.5%, five years to maturity, and is currently priced to yield
7.5%. Calculate the following:
 Macauley duration
 Modified duration
 Effective duration
 Percentage change in price for a 1% increase in the yield to maturity

Problem 3
Consider a bond that has a coupon rate of 7%, three years to maturity, and is currently priced to yield
5%. Calculate the following:
 Macauley duration
 Modified duration
 Effective duration
 Percentage change in price for a 1% increase in the yield to maturity

Problem 4
Consider a zero coupon bond wth three years to maturity, and is currently priced to yield 5%. Calculate
the following:
 Macauley duration
 Modified duration
 Effective duration
 Percentage change in price for a 1% increase in the yield to maturity

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Problem 5
Consider a bond that has a coupon rate of 2%, five years to maturity, and is currently priced to yield 5%.
Calculate the following:
 Macauley duration
 Modified duration
 Effective duration
 Percentage change in price for a 1% increase in the yield to maturity

Problem 6
Consider a bond that has a coupon rate of 5.5%, five years to maturity, and is currently priced to yield
8%. Calculate the following:
 Macauley duration
 Modified duration
 Effective duration
 Percentage change in price for a 1% increase in the yield to maturity

Problem 7
Consider a bond that has a coupon rate of 5%, three years to maturity, and is currently priced to yield
7%. Calculate the following:
 Macauley duration
 Modified duration
 Effective duration
 Percentage change in price for a 1% increase in the yield to maturity

Problem 8
Consider a zero coupon bond with five years to maturity that is currently priced to yield 8%. Calculate
the following:
 Macauley duration
 Modified duration
 Effective duration
 Percentage change in price for a 1% increase in the yield to maturity

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Solutions
Percentage
change in price
Yield to Macauley Modified Effective for a 1%
Problem Coupon Maturity maturity duration duration duration increase in YTM
1 5% 5 6% 4.4717 4.3414 4.3436 -4.34%
2 7.5% 5 7.5% 4.2604 4.1064 4.1083 -4.11%
3 7% 3 5% 2.7650 2.6976 2.6982 -2.70%
4 0% 3 5% 3.0000 2.9268 2.6982 -2.93%
5 2% 5 5% 4.7631 4.6469 4.6493 -4.65%
6 5.5% 5 8% 4.4015 4.2322 4.2342 -4.23%
7 5% 3 7% 2.8171 2.7218 2.7224 -2.72%
8 0% 3 8% 3.0000 2.8846 2.8852 -2.88%

𝑇𝑖𝑚𝑒 𝑤𝑒𝑖𝑔𝑕𝑡𝑒𝑑 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒

𝑀𝑎𝑐𝑎𝑢𝑙𝑒𝑦 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛
𝑀𝑜𝑑𝑖𝑓𝑖𝑒𝑑 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛 =
𝑌𝑖𝑒𝑙𝑑 𝑡𝑜 𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑦
1+ 2
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑏𝑜𝑛𝑑 𝑖𝑓 𝑌𝑇𝑀 − 0.01 − 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑏𝑜𝑛𝑑 𝑖𝑓 𝑌𝑇𝑀 + 0.01
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛 =
2 × 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡𝑕𝑒 𝑏𝑜𝑛𝑑 × 0.01

% 𝑐𝑕𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑓𝑜𝑟 𝑎 1% 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑌𝑇𝑀 = −1 × 0.01 × 𝑚𝑜𝑑𝑖𝑓𝑖𝑒𝑑 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛

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Detail

Problem 1
Weighted
Present present
Period time Cash flow value value
1 0.5 $2.500 $2.427 $1.21
2 1 $2.500 $2.356 $2.36
3 1.5 $2.500 $2.288 $3.43
4 2 $2.500 $2.221 $4.44
5 2.5 $2.500 $2.157 $5.39
6 3 $2.500 $2.094 $6.28
7 3.5 $2.500 $2.033 $7.11
8 4 $2.500 $1.974 $7.89
9 4.5 $2.500 $1.916 $8.62
10 5 $102.500 $76.270 $381.35
Sum $95.735 $428.096

Problem 2
Weighted
Present present
Period time Cash flow value value
1 0.5 $3.750 $3.614 $1.81
2 1 $3.750 $3.484 $3.48
3 1.5 $3.750 $3.358 $5.04
4 2 $3.750 $3.237 $6.47
5 2.5 $3.750 $3.120 $7.80
6 3 $3.750 $3.007 $9.02
7 3.5 $3.750 $2.898 $10.14
8 4 $3.750 $2.793 $11.17
9 4.5 $3.750 $2.692 $12.12
10 5 $103.750 $71.797 $358.99
Sum $100.000 $426.038

Problem 3
Weighted
Present present
Period time Cash flow value value
1 0.50 $3.500 $3.415 $1.71
2 1.00 $3.500 $3.331 $3.33
3 1.50 $3.500 $3.250 $4.88
4 2.00 $3.500 $3.171 $6.34
5 2.50 $3.500 $3.093 $7.73
6 3.00 $103.500 $89.248 $267.74
Sum $121.000 $105.508 $291.732

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Problem 4
Weighted
Present present
Period time Cash flow value value
1 0.50 $0.000 $0.000 $0.00
2 1.00 $0.000 $0.000 $0.00
3 1.50 $0.000 $0.000 $0.00
4 2.00 $0.000 $0.000 $0.00
5 2.50 $0.000 $0.000 $0.00
6 3.00 $100.000 $86.230 $258.69
Sum $100.000 $86.230 $258.689

Problem 5
Weighted
Present present
Period time Cash flow value value
1 0.5 $1.000 $0.976 $0.49
2 1 $1.000 $0.952 $0.95
3 1.5 $1.000 $0.929 $1.39
4 2 $1.000 $0.906 $1.81
5 2.5 $1.000 $0.884 $2.21
6 3 $1.000 $0.862 $2.59
7 3.5 $1.000 $0.841 $2.94
8 4 $1.000 $0.821 $3.28
9 4.5 $1.000 $0.801 $3.60
10 5 $101.000 $78.901 $394.51
Sum $86.872 $413.777

Problem 6
Weighted
Present present
Period time Cash flow value value
1 0.5 $2.750 $2.644 $1.32
2 1 $2.750 $2.543 $2.54
3 1.5 $2.750 $2.445 $3.67
4 2 $2.750 $2.351 $4.70
5 2.5 $2.750 $2.260 $5.65
6 3 $2.750 $2.173 $6.52
7 3.5 $2.750 $2.090 $7.31
8 4 $2.750 $2.009 $8.04
9 4.5 $2.750 $1.932 $8.69
10 5 $102.750 $69.414 $347.07
Sum $89.861 $395.521

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Problem 7
Weighted
Present present
Period time Cash flow value value
1 0.50 $2.500 $2.415 $1.21
2 1.00 $2.500 $2.334 $2.33
3 1.50 $2.500 $2.255 $3.38
4 2.00 $2.500 $2.179 $4.36
5 2.50 $2.500 $2.105 $5.26
6 3.00 $102.500 $83.384 $250.15
Sum $115.000 $94.671 $266.695

Problem 8
Weighted
Present present
Period time Cash flow value value
1 0.50 $0.000 $0.000 $0.00
2 1.00 $0.000 $0.000 $0.00
3 1.50 $0.000 $0.000 $0.00
4 2.00 $0.000 $0.000 $0.00
5 2.50 $0.000 $0.000 $0.00
6 3.00 $100.000 $79.031 $237.09
Sum $100.000 $79.031 $237.094