rate risk by buying a bond that has a duration equal to the years until the funds will be needed
(approximately ten years from today). The home is considering a 20-year, 9 percent annual coupon bond
bought at its par value of $1,000.
a. What is the duration of this bond?
b. If the nursing home purchases $4,224,000 worth of this bond, what would be the value of the bonds at the
end of the duration period if interest rates fall to 7 percent immediately after the purchase and remain at
that level? If interest rates rise to 12 percent?
This question was asked on Jul 26, 2010 and answered on Jul 29, 2010.
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