Problem
There are two bonds available:
Bond A that pays a semi-annual coupon at a rate of 4% per annum and matures in 4 years;
Bond B that pays a semi-annual coupon at a rate of 7% per annum and matures in 4 years.
The yield curve is flat at 6% per annum.
1. Calculate the duration of each bond manually, then check your answers in Excel. How does coupon rate affect duration?
2. If the interest rates change to 6.25%, what are the prices of the bonds? What are the prices if interest rates change to 7.50% instead?