In the spreadsheet below, create a Data Table in which the duration is computed as a function of the coupon rate (coupon = 0%, 1%, … , 11%). Comment on the relation between the coupon rate and the duration Current date 21-May-07
Maturity, in years 21
Maturity date 21-May-27
ytm 15%
Coupon 4%
Face value 1,000
Duration 9.03982 <-- =DURATION(B2,B4,B6,B5,1)
What is the effect on a bond ’ s duration of increasing the bond ’ s maturity? As in the previous example, use a numerical example and plot the answer. Note that as N → ∞ , the bond
becomes a consol (a bond that has no repayment of principal but an infinite stream of
coupon payments). The duration of a consol is given by (1 + YTM ) / YTM . Show that your
numerical answers converge to this formula. A pure discount bond with maturity N is a bond with no payments at times t = 1, … , N
− 1; at time t = N , a pure discount bond has a single terminal payment of both principal
and interest. What is the duration of such a bond?