00:01
Hello students.
00:03
So, let us look at this question here we need to calculate the duration of a bond.
00:07
So, we can use the formula of duration that is duration which is equal to summation of pv of cf that is cash flow multiplied by time period time period and then divided by current bond price current bond price current bond price.
00:43
Now, we know that the pv of cash flow is the present value of the cash flow at a particular time period and time period is the number of years until the cash flow is received and current bond price is the current price of the bond.
00:57
So, to begin with the calculation we have to calculate the cash flows and their present values for each year of the bonds life.
01:04
So, coupon payment per year would be 7 percent multiplied by 1000 dollar that is phase value phase value.
01:24
So, it would be 70 dollar and for year 1 first of all for year 1 the cash flow would be 70 percent that is coupons payment divided by 1 plus 8 .2 percent raised to the power 1 which is equal to 64 .81 percent.
01:54
Similarly for year 2 year 2 the cash flow would be cf would be 17 percent that is coupon payment divided by 1 plus 8 .2 raised to the power 2 because it is second year which is equal to 59 .77 dollar and similarly for year 3 we can calculate that is cf would be 70 dollar divided by 1 plus 8 .2 raised to the power 3 which is equal to 55 .14 dollar.
02:30
Now for year 4 we will calculate year 4 same like this also cf would be 70 dollar that is coupon payment divided by 1 plus 8 point sorry year 4 will be calculated in a much different way because here the phase value at maturity also come...