Asked by Gloria Kirby on Jun 06, 2024
Verified
An 8%, 30-year corporate bond was recently being priced to yield 10%. The Macaulay duration for the bond is 10.20 years. Given this information, the bond's modified duration would be
A) 8.05.
B) 9.44.
C) 9.27.
D) 11.22.
E) None of the options are correct.
Modified Duration
A measure indicating the sensitivity of a bond's price to changes in interest rates, estimating the percentage price change for a parallel shift in yield curves.
Yield
The income return on an investment, such as the interest or dividends received, expressed as an annual percentage of the investment's cost.
- Recognize the concepts of duration and modified duration as measures of interest rate sensitivity.
Verified Answer
BR
Barri’ Ragland-EnglishJun 11, 2024
Final Answer :
C
Explanation :
The modified duration is calculated as the Macaulay duration divided by (1 + (yield/number of coupon periods per year)). Assuming semi-annual coupon payments, the calculation is 10.20 / (1 + (0.10/2)) = 10.20 / 1.05 = 9.27.
Learning Objectives
- Recognize the concepts of duration and modified duration as measures of interest rate sensitivity.