quiz3 solution - FIN4014 fall 2016 Quiz 3 Bond A is a...

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FIN4014 fall 2016 Quiz 3 Bond A is a 1-year zero coupon bond with a par of $1,000. Bond B is a 1-year 10% coupon bond with a par of $1,000. The current yield to maturity is 10%. a)Calculate the Macaulay duration and the modified duration for bonds A and B. Macaulay duration in half years: Bond A: D(A)=2*(1000/1000)=2 Bond B: D(B)=1*[50/(1.05)]/P(B)+2*[1050/ (1.05)^2]/P(B)=1.9524 Modified duration in half years: MD(A)=2/(1+5%)=1.9048 MD(B)=1.9524/(1+5%)=1.8594 b)Suppose a bond portfolio includes a bond A and a bond B. What are the Macaulay duration and the
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