Problem: Pleasant View Nursing Home has decided to immunize its portfolio against interest rate and reinvestment 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.
Q1. What is the duration of this bond?
Q2. 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?