| Course | FIN 340 Fundamentals of Investments |
|---|---|
| Module | Module 6 |
| Paper type | undergraduate assignment on bond pricing, yields and interest rate risk |
| Length | About 1,020 words, 6 pages |
| Format | APA 7 student paper |
| School | Southern New Hampshire University |
| Program | BS Finance |
| Updated | October 2026 |
Free sample paper for FIN 340 Module 6
Bond Prices, Yields and Interest Rate Risk for a Retirement Ladder
[Student Name]
Southern New Hampshire University
FIN 340: Fundamentals of Investments
Module Six Assignment
[Instructor Name]
[Date]
The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.
Bond Prices, Yields and Interest Rate Risk for a Retirement Ladder
Introduction
Gordon and Renee Abernathy, the composite couple in this course, plan to retire in eight years and want part of their savings in bonds that will pay for their first years of retirement regardless of what stocks do. This paper prices three kinds of bonds, calculates their yields, measures their interest rate risk and explains why corporate bonds pay more than Treasuries. It ends by designing a ladder of Treasury notes the couple could build as retirement approaches. All bonds have a face value of $1,000 and pay interest twice a year.
Pricing Three Bonds
What a buyer should pay for a bond equals its future interest checks and its repaid face value, each discounted back at the yield the market demands. For the Treasury note, the 4 percent coupon pays $20 every six months for ten periods, and the 4.2 percent yield becomes 2.1 percent per period:
The ten coupons are worth $20 times an annuity factor of 8.932 at 2.1 percent, or $178.65, and the $1,000 repaid in five years is worth $1,000 divided by 1.021 raised to the tenth power, or $812.42. Together they give a price of $991.06.
Because the yield is above the coupon rate, the note sells at a small discount.
Three bonds at late-2025 yields
| Bond | Coupon | Maturity | Required yield | Price | Current yield |
|---|---|---|---|---|---|
| U.S. Treasury note | 4.0% | 5 years | 4.2% | $991.06 | 4.04% |
| A-rated industrial corporate bond | 5.0% | 10 years | 5.1% | $992.24 | 5.04% |
| Treasury zero-coupon bond (STRIPS) | None | 10 years | 4.5% | $640.82 | None |
Current Yield and Yield to Maturity
Current yield is the annual coupon divided by the price: $40 / $991.06 = 4.04 percent for the Treasury note. It describes cash income only. Yield to maturity, 4.2 percent, is the single rate that makes the present value of all future payments equal the price, so it also counts the $8.94 gain as the note rises to face value by maturity. For the zero, current yield does not exist because it pays no coupons; its entire 4.5 percent return comes from growing from $640.82 to $1,000 over ten years.
Interest Rate Risk and Duration
When rates rise, the fixed payments of existing bonds become less valuable, so prices fall. Duration measures how much. Macaulay duration is the weighted average time until a bond's cash flows are received; modified duration, Macaulay duration divided by one plus the yield per period, approximates the percentage price change for a 1-point change in yield.
Duration and price change for a 1-point rise in yield
| Bond | Macaulay duration | Modified duration | Estimated price change | Actual new price | Actual change |
|---|---|---|---|---|---|
| 5-year Treasury | 4.58 years | 4.48 | -$44.45 | $947.76 | -$43.30 |
| 10-year corporate | 7.98 years | 7.78 | -$77.21 | $918.55 | -$73.69 |
| 10-year zero | 10.00 years | 9.78 | -$62.67 | $581.25 | -$59.57 |
The estimates are close but slightly overstate the loss, because the price and yield relationship is curved, a property called convexity. The zero has the longest duration, equal to its maturity, so it is the most sensitive in percentage terms: a 1-point rise cuts its price by more than 9 percent. Litterman and Scheinkman (1991) found that most of the variation in Treasury returns comes from shifts in the overall level of rates, which is exactly the risk duration measures.
Why the Corporate Bond Pays More
The corporate bond yields 5.1 percent against about 4.5 percent for a 10-year Treasury, a spread of about 0.6 points. Investors are not paid this extra only for expected defaults. Elton et al. (2001) broke corporate spreads into parts and found that likely losses from default accounted for a modest fraction; state taxes, which apply to corporate interest but not to Treasury interest, explained a large share, and the rest was a premium for bearing systematic risk. For the Abernathys, who live in New Hampshire and pay no state income tax on interest, the tax part of the spread is a small benefit, but the corporate bond also carries default and call risk that Treasuries do not.
A Ladder for the Early Retirement Years
The couple's plan from Project One calls for about two years of withdrawals held in safe assets near retirement. A ladder takes this idea further: bonds maturing in each of the first five years of retirement, so that money comes due every year without selling anything. Fisher and Weil (1971) showed that matching the duration of bonds to the date money is needed protects an investor against rate changes, because the loss in price from higher rates is offset by reinvesting coupons at higher rates. Each rung of a ladder held to maturity does this automatically.
Illustrative $150,000 Treasury ladder (bought in the couple's last working years)
| Rung | Maturity | Amount | Approximate yield | Annual interest |
|---|---|---|---|---|
| 1 | 2027 | $30,000 | 3.7% | $1,110 |
| 2 | 2028 | $30,000 | 3.7% | $1,110 |
| 3 | 2029 | $30,000 | 3.8% | $1,140 |
| 4 | 2030 | $30,000 | 3.9% | $1,170 |
| 5 | 2031 | $30,000 | 4.0% | $1,200 |
The table illustrates the structure with current yields; the couple would buy the real rungs over their last few working years so that maturities line up with their first retirement years. Each year one rung matures to fund spending, and if stocks are doing well the couple can buy a new five-year rung at the far end. Treasuries suit this purpose better than corporate bonds because the money must be there on time, and holding each note to maturity means price swings along the way do not matter. The ladder should sit mainly in their IRAs, where interest is not taxed until withdrawn. A ladder has one drawback worth naming: if rates fall sharply, each maturing rung must be reinvested at lower yields, so the income from new rungs drops. For the Abernathys this is acceptable, because the ladder's job is to supply known amounts in known years while their stock funds handle growth, and Social Security, which rises with inflation, will cover most of their spending from the late 2030s onward.
Conclusion
Bond prices move opposite to rates, and duration tells an investor by roughly how much. Longer bonds and zeros pay more for that risk; corporate bonds pay more for credit and tax differences. For a couple who need dependable cash in specific years, a Treasury ladder held to maturity turns those risks into a schedule.
References
Elton, E. J., Gruber, M. J., Agrawal, D., & Mann, C. (2001). Explaining the rate spread on corporate bonds. The Journal of Finance, 56(1), 247-277. https://doi.org/10.1111/0022-1082.00324
Fisher, L., & Weil, R. L. (1971). Coping with the risk of interest-rate fluctuations: Returns to bondholders from naive and optimal strategies. The Journal of Business, 44(4), 408-431. https://doi.org/10.1086/295402
Litterman, R. B., & Scheinkman, J. (1991). Common factors affecting bond returns. The Journal of Fixed Income, 1(1), 54-61. https://doi.org/10.3905/jfi.1991.692347
What the FIN 340 Module 6 instructions ask for
The Module Six assignment in FIN 340 normally asks you to value bonds and explain the relationship between bond prices and interest rates. Expect to calculate a bond's price from its coupon, maturity and required yield, to find its current yield and yield to maturity and to explain why prices fall when rates rise. Many versions also introduce duration, credit ratings and the yield spread between corporate and Treasury bonds, or ask which bonds would suit a particular investor. A strong submission shows each calculation step by step, interprets the results and ends with a recommendation for an investor rather than leaving the numbers to speak for themselves.
How this FIN 340 Module 6 bond valuation assignment example is built
The sample prices three bonds at late-2025 yields: a 5-year Treasury note with a 4 percent coupon at $991.06, a 10-year A-rated corporate bond with a 5 percent coupon at $992.24 and a 10-year zero at $640.82. It explains current yield and yield to maturity for each, then uses modified duration of 4.48, 7.78 and 9.78 years to estimate the loss from a 1-point rise in rates and compares the estimates with exact repricing. A section on the corporate bond's spread over Treasuries draws on research into default, tax and risk premiums. The paper closes by building a $150,000 ladder of Treasury notes maturing from 2027 to 2031 to fund the composite Abernathys' early retirement withdrawals.
Where the FIN 340 Module 6 rubric puts the points
The rubric for this assignment often covers correct bond pricing calculations, accurate yield measures, explanation of the price and yield relationship, understanding of interest rate and credit risk and application to an investor. Strong papers show the cash flows and discounting for each bond, note the semiannual convention, interpret duration in dollars and explain what the yield spread compensates for. Weaker papers report prices from a calculator with no work, confuse current yield with yield to maturity or describe duration as a bond's maturity. A clear recommendation for an investor, supported by the calculations, is usually its own criterion, along with clear tables and APA citations. Instructors also look for a sentence explaining why a bond selling at a discount has a yield to maturity above its coupon rate.
FIN 340 Module 6 help: the mistakes that cost points
Most mistakes here come from conventions. U.S. bonds usually pay interest twice a year, so halve the coupon and the yield and double the number of periods. Price each bond as the present value of its coupons plus the present value of its face value, and show one bond in full. Remember that current yield ignores the gain or loss as the bond moves toward face value, while yield to maturity includes it. When you discuss duration, translate it into dollars: a modified duration of 7.8 means a 1-point rate rise cuts the price by about 7.8 percent. Then connect the numbers to the investor, since the point of the assignment is choosing bonds, not only pricing them.
Get FIN 340 Module 6 written to your instructions
Send the FIN 340 Module 6 directions with the bonds or yields you were given. The sample prices each bond, works out yields and duration with every step shown and links the results to an investor's needs. Expect it in two days, and the first one is free. The paper above is an original model document written by our desk, not a submitted student paper and not an official Southern New Hampshire University document.
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FIN 340 Module 6 questions, answered
Where can I find a free FIN 340 Module 6 Bond Valuation sample?
This page includes the full FIN 340 Module 6 paper: three bonds priced, yields and duration worked out, and a Treasury ladder built for a couple near retirement.
How do you calculate the price of a bond?
Find the present value of every interest check and of the final $1,000 using the yield per period, then add them; for semiannual bonds, use half the coupon and half the yield.
What is the difference between current yield and yield to maturity?
Current yield is the annual coupon divided by the price; yield to maturity is the total return if the bond is held to maturity, including the gain or loss from price to face value.
What does duration measure?
How sensitive a bond's price is to interest rate changes; modified duration gives the approximate percentage price change for a 1-point change in yield.
What is a bond ladder?
A set of bonds maturing in successive years, so that some money comes due each year for spending or reinvestment, reducing the risk of having to sell bonds when rates are high.