ECONOMICS
RISK AND RETURN
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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5% yield and 10-year maturity
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5% yield and 20-year maturity.
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6% yield and 1 0-year maturity.
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None of the above
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Detailed explanation-1: -Macaulay duration is the weighted average of the time to receive the cash flows from a bond. It is measured in units of years. Macaulay duration tells the weighted average time that a bond needs to be held so that the total present value of the cash flows received is equal to the current market price paid for the bond.
Detailed explanation-2: -Example: Consider a 2-year coupon bond with a face and redemption value of $100 and a coupon rate of 10% per annum payable semiannually and a yield to maturity of 12% per annum compounded semiannually. Find the Macaulay Duration. The Macaulay Duration is 3.7132 semiannual periods or 1.86 years.
Detailed explanation-3: -Macaulay duration is the is the weighted average term to maturity of the cash flows from a bond. Modified duration is a bond’s price sensitivity to changes in interest rates, which takes the Macaulay duration and adjusts it for the bond’s yield to maturity (YTM).
Detailed explanation-4: -Macaulay Duration Duration cannot exceed the number of periods to maturity of the bond. The Duration of a zero-coupon bond is the number of years until maturity.