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Homework answers / question archive / You currently have $2,500 invested in a discount bond at an annual yield of i = 8%
You currently have $2,500 invested in a discount bond at an annual yield of i = 8%. If the face value of this bond is $3,500, what is the maturity of this bond?
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Calculation of maturity of bond:
Bond Value = Fair Value / (1+r)n
3500 = 2500 / (1+8%)n
3500 / 2500 = (1.08)n
1.40 = (1.08)n
Now we need to use trial & error method by different value to find n:
if n = 5 then (1.08)5 = 1.4693
if n = 4 then (1.08)4 = 1.3604
Now by using interpolation method we get value of n: z + [(y2-y1)/{(x2-y2)+(y2-y1)} * (z1-z)]
here,
z=4
z1=5
y2=1.40
y1=1.3604
x2=1.4693
4 + [{(1.40-1.3604) / ((1.4693-1.40) + (1.40-1.3604))} * (5-4)} = 4.3630
So the maturity of this bond is 4.36 years or 4 years 4 months (i.e.12*0.363=4.36) and 11 days (i.e.((12*0.363)-4)*30=10.80)
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