# Solution Library

# Calculate Duration Of Bond And Change In Price Of Bonds

**Question**

1. An FI purchases a $9,982 million pool of commercial loans at par. The loans have an interest rate of 8 percent, a maturity of five years, and annual payments of principal and interest that will exactly amortize the loan at maturity. What is the duration of this asset?

a. 4.12 years.

b. 3.07 years.

c. 2.50 years.

d. 2.85 years.

e. 5.00 years.

2. A $1,000 six-year Eurobond has an 8 percent coupon, is selling at par, and contracts to make annual payments of interest. The duration of this bond is 4.99 years. What will be the new price using the duration model if interest rates increase to 8.5 percent?

a. $23.10.

b. $976.90.

c. $977.23.

d. $1,023.10.

e. –$23.10.

3. An FI purchases at par value a $100,000 Treasury bond paying 10 percent interest with a 7.5 year duration. If interest rates rise by 4 percent, calculate the bond's new value. Recall that Treasury bonds pay interest semiannually. Use the duration valuation equation.

a. $28,571.43.

b. $20,864.46.

c. $15,000.00.

d. $20,864.46.

e. $71,428.57.

4. What is the duration of a 5-year par value zero coupon bond yielding 10 percent annually?

a. 0.50 years.

b. 2.00 years.

c. 4.40 years.

d. 5.00 years.

e. 4.05 years.

**Summary**

These short questions belong to Finance. The 1st question is about calculating the life of an asset based on interest rates and repayment of principal and interest to amortize the loan completely. The 2nd and 3rd questions are about calculation of new price at par with an increase in interest rate.

**Total Word Count 145**

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