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FIN 4130 hw4

# FIN 4130 hw4 - FIN 4130 Management of Financial...

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FIN 4130: Management of Financial Institutions Fall 2009 Homework 4 Due: Thursday, October 8, 2009 Pick 5 of the 7 problems to answer and turn in at the start of class. Chapter 9: 7. A six-year, \$10,000 CD pays 6 percent interest annually. a. What is the duration of the CD? Time CF DF CF X DF CF X DF X t 1 600 0.943396 566.0376 566.0376 2 600 0.889996 533.9976 1067.9952 3 600 0.839616 503.7696 1511.3088 4 600 0.792092 475.2552 1901.0208 5 600 0.747256 448.3536 2241.768 6 10600 0.70496 7472.576 44835.456 Total 9999.9896 52123.5864 Duration 5.212364061 b. What would be the duration if interest were paid semiannually? Time CF DF CF X DF CF X DF X t 1 300 0.9426 282.78 282.78 1.5 300 0.9151 274.53 411.795 2 300 0.8885 266.55 533.1 2.5 300 0.8626 258.78 646.95 3 300 0.8375 251.25 753.75 3.5 300 0.8131 243.93 853.755 4 300 0.7894 236.82 947.28 4.5 300 0.7664 229.92 1034.64 5 300 0.7441 223.23 1116.15

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5.5 300 0.7224 216.72 1191.96 6 300 0.7014 210.42 1262.52 6.5 10300 0.681 7014.3 45592.95 Total 9709.23 54627.63 Duration 5.62636069 c. What is the relationship of duration to the relative frequency of interest payments? -Duration increases with more frequent interest payments. 9. Suppose you purchase a five-year, 15 percent coupon bond (paid annually) that is priced to yield 9 percent. The face value of the bond is \$1,000.
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FIN 4130 hw4 - FIN 4130 Management of Financial...

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