A Ford Motor Co. coupon bond has a coupon rate of 4?%, a face value of ?$1,000? and pays annual coupons. The bond will mature in 4 years. The? bond's yield-to-maturity is 5.3%. What is this bond's Macaulay Duration? (MacD)?
?(Hint: Not covered in the eText. Check out your class notes and the TopHat note titled? "Bond risk and? duration".
Step? 1: Find the coupon amounts and draw the cashflow timeline.
Step? 2: Compute the? bond's price discounting each cashflow one by one from Step 1 at the? bond's yield-to-maturity.
Step? 3: Multiply each? cashflow's present value from Step 2 with that cash? flow's duration. For? example, the coupon to be paid in 2 years has a duration of 2.
Step? 4: Add up the terms from Step 3 and divide the sum by the? bond's price from Step2. This is the? bond's MacD).