Question: Two bonds are available for purchase in the financial markets. The first bond is a two-year, $1,000 bond that pays an annual coupon of 10 percent. The second bond is a twoyear, $1,000, zero-coupon bond.
a. What is the duration of the coupon bond if the current yield to maturity is 8 percent? 10 percent? 12 percent?
b. How does the change in the current yield to maturity affect the duration of this coupon bond?
c. Calculate the duration of the zero-coupon bond with a yield to maturity of 8 percent, 10 percent, and 12 percent.
d. How does the change in the yield to maturity affect the duration of the zero-coupon bond?
e. Why does the change in the yield to maturity affect the coupon bond differently than it affects the zero-coupon bond?