Comparison - Coupon Rate

Comparison Coupon - Comparison Coupon Rate Duration is impacted by the coupon rate Bonds with high coupon rates have lower durations Below holding

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Comparison - Coupon Rate 1 Duration is impacted by the coupon rate. Bonds with high coupon rates have lower durations. Below, holding the yield constant, duration increases from 1.883 years to 1.909 years with a 2% decrease in the coupon rate. Since 6% is less than 8%, less of the return from this bond comes from interest Yield: 12.0% Period Yield: 6.0% Yield: 12.0% Period Yield: 6.0% Coupon Rate: 8.0% Coupon Rate: 6.0% Time Cash Flows Discount Factor Discounted Cash Flows Weighted Average Time Cash Flows Discount Factor Discounted Cash Flows 1 $40 0.9433962 $37.74 18.87 1 $30 $28.30 14.15 2 0.8899964 $35.60 35.60 2 $26.70 26.70 3 0.8396193 $33.58 50.38 3 $25.19 37.78 4 $1,040 0.7920937 $823.78 1647.55 4 $1,030 $815.86 1631.71 $1,160 $930.70 1752.40 $1,120 $896.05 1710.35 Duration = 1752.40 / 930.70 1.883 Years 1.909
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2 Duration is also impacted by changes in yield. Duration decreases when bond yields increase. Below, holding the coupon rate constant, duration falls from 1.883 years to 1.878. The higher the yield-to-maturity, the more that is earned on reinvested interest and it Comparison - Yield Yield: 12.0% Period Yield: 6.0% Yield: 16.0% Period Yield: 8.0% Coupon Rate: 8.0% Coupon Rate: 8.0% Time Cash Flows
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This note was uploaded on 01/26/2012 for the course FIN 4620 taught by Professor Patriciarobertson during the Spring '12 term at Kennesaw.

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Comparison Coupon - Comparison Coupon Rate Duration is impacted by the coupon rate Bonds with high coupon rates have lower durations Below holding

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