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An insurance company is analyzing three bonds and is using duration as the measure of interest rate risk. The three bonds all trade at a YTM of 10 percent and have R10 000 par values. The bonds differ only in the amount of annual coupon interest that they pay: 8, 10, or 12 percent.

a) What is the duration for each five-year bond?

b) State the relationship between duration and the amount of coupon interest that is paid?

c) Use a graph to show the relationship between duration and the amount of coupon interest that is paid (Note: Use ordinary plain paper to draw an approximation of the graph).

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