An insurance company is analyzing three bonds and is using duration as the measure of interest rate risk. The three bonds all trade at a YTM of 10 percent and have R10 000 par values. The bonds differ only in the amount of annual coupon interest that they pay: 8, 10, or 12 percent.
a) What is the duration for each five-year bond?
b) State the relationship between duration and the amount of coupon interest that is paid?
c) Use a graph to show the relationship between duration and the amount of coupon interest that is paid (Note: Use ordinary plain paper to draw an approximation of the graph).