How do you calculate the duration of a zero-coupon bond?
The computation of Macaulay duration can be complicated and has a number of variations, but the primary version is calculated by adding up the coupon payment per period, multiplied by the time to maturity, divided by 1, plus the yield per period raised to the time to maturity.
What is the duration of a 10 year zero-coupon bond?
6.76 years
As the calculation in Table 1 shows, the duration of a ten-year 10% coupon bond is 6.76 years.
What is the duration of a 30 year zero-coupon bond?
30 years
A 30 year zero has a duration of 30 years. Keeping in mind the rule of thumb that the percentage price change of a bond roughly equals its duration times the change in interest rates, one can begin to see how much more volatile a zero can be than a coupon bond.
What is a zero-coupon bond example?
A zero-coupon bond is a bond that pays no interest and trades at a discount to its face value. It is also called a pure discount bond or deep discount bond. U.S. Treasury bills are an example of a zero-coupon bond.
What is bond duration with example?
For example, if a bond has a duration of five years and interest rates increase by 1%, the bond’s price will decline by approximately 5%. Conversely, if a bond has a duration of five years and interest rates fall by 1%, the bond’s price will increase by approximately 5%.
What is zero-coupon bond How does it work?
Zero coupon bonds are bonds that do not pay interest during the life of the bonds. Instead, investors buy zero coupon bonds at a deep discount from their face value, which is the amount the investor will receive when the bond “matures” or comes due.
Which is also called zero-coupon bond?
A zero-coupon bond, also known as an accrual bond, is a debt security that does not pay interest but instead trades at a deep discount, rendering a profit at maturity, when the bond is redeemed for its full face value.
What is Bond duration with example?
What is the example of duration?
Duration is defined as the length of time that something lasts. When a film lasts for two hours, this is an example of a time when the film has a two hour duration. An amount of time or a particular time interval. A measurement of a bond’s price sensitivity to changes in interest rates.
What is the duration of a 10 year bond?
Therefore, to increase the duration of a portfolio, a manager can either invest in longer maturity issues, or leverage shorter maturities. Assume for instance that investors put $100 million in a portfolio….8% Yield, 8% Coupon Bonds.
| Maturity | Duration |
|---|---|
| (Years) | (Years) |
| 7 | 5.21 |
| 10 | 6.71 |
| 30 | 11.26 |
Why would a company issue a zero-coupon bond?
After 20 years, the issuer of the bond pays you $10,000. For this reason, zero-coupon bonds are often purchased to meet a future expense such as college costs or an anticipated expenditure in retirement. Federal agencies, municipalities, financial institutions and corporations issue zero-coupon bonds.
WHO issued zero-coupon bond?
Federal agencies, municipalities, financial institutions and corporations issue zero-coupon bonds.
What is another name for zero-coupon bond?
What are the benefits of zero-coupon bonds?
Advantages of zero-coupon bonds
- They often have higher interest rates than other bonds.
- They offer a predictable payout.
- They’re very sensitive to interest rates.
- You have to pay taxes on income you don’t get.
- There is a default risk.
- Bonds vs.
What is also called zero-coupon bond?
What is the Modified duration of a zero coupon bond?
the modified duration of a zero-coupon bond is the time til maturity. for example, the modified duration of a 10-year, zero-coupon bond is ten years. if you purchase the above bond when it is halfway to maturity, the modified duration is half that, or equal to five years.
What is the interest rate on the zero coupon bond?
John is looking to purchase a zero-coupon bond with a face value of $1,000 and 5 years to maturity. The interest rate on the bond is 5% compounded annually. What price will John pay for the bond today?
What is the time value of money formula for zero-coupon bonds?
Time value of money formulas usually require interest rate figures for each point in time. This consequently renders the yield to maturity easier to calculate for zero-coupon bonds. There are no coupon payments to reinvest, making it equivalent to the normal rate of return on the bond.