Course Solutions Uncategorized (Answered) : Suppose Trying Determine Interest Rate Sensitivity Two Bonds Bond 1 12 Coupon Bond 7 Year Q28208982

(Answered) : Suppose Trying Determine Interest Rate Sensitivity Two Bonds Bond 1 12 Coupon Bond 7 Year Q28208982

Suppose you are trying to determine the interest ratesensitivity of two bonds. Bond 1 is a 12% coupon bond with a 7-yearmaturity and a $1000 principal. Bond 2 is a ‘zero-coupon’ bond thatpays $1120 after 7 year. The current interest rate is 12%.

– Determine the duration of each bond.

– If the interest rate increases 100 basis points (100 basispoints = 1%), what will be the capital loss on each bond?

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