2. A government bond currently carries a yield to maturity of 6 percent and a market price of $1,168.49. If the bond promises to pay $100 in interest annually for five years, what is its current duration?

Duration of bond is 4.24 years.

Explanation:

Duration of bond = Sum of (present value of cash flow*n)/Price of bond  

n  = Year in which cash flow is received

Face value of bond = $1,000

Year (n)    Cash flow     Discount factor at 6%  Present value   Pv*n

1                $100.00              0.943396226           $94.34          $94.34

2               $100.00              0.88999644             $89.00         $178.00

3               $100.00              0.839619283            $83.96         $251.89

4               $100.00              0.792093663            $79.21          $316.84

5               $1,100.00            0.747258173             $821.98       $4,109.92

                                                                               $1,168.49      $4,950.98

Duration of bond = 4950.98/1168.49    

Duration of bond = 4.24 years

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