an investor purchases an annual coupon bond with a 6% coupon rate and exactly 20 years remaining until maturity at a price equal to par value. The investor's investment horizon is Eight years. The approximate modified duration of the bond is 11.470 years. The duration Gap at the time of purchase is closest to:

Question

Quizplus · Accepted Answer

The duration gap is calculated as the difference between the investment horizon and the bond's modified duration. In this case, it's 8 years (investment horizon) - 11.470 years (modified duration) = -3.470 years. However, the correct calculation should result in a negative value, indicating the duration gap. The provided options seem to contain a mistake as none directly match the calculated value. The closest correct approach to finding a duration gap would be subtracting the investment horizon from the modified duration, but the options given do not accurately reflect this calculation based on the information provided. Given the context, option C seems to be an attempt to reflect a duration gap, but the calculation provided in the explanation does not directly match any of the options accurately.

An Investor Purchases an Annual Coupon Bond with a 6