What is the duration of this bond?
A)5 years.
B)4.31 years.
C)3.96 years.
D)5.07 years.
E)Not enough information to answer. [Refer to: 9-102]

Question

Quizplus · Accepted Answer

The duration of the bond can be calculated using the formula:
Duration = (Present value of cash flows * Time period of the cash flows)/Present value of the bond

Using the given information, we can calculate the present value of the cash flows and the present value of the bond as follows:

Present value of the coupon payments = $70/(1+0.05) + $70/(1+0.05)^2 + $1070/(1+0.05)^3 = $1073.96
Present value of the face value = $1000/(1+0.05)^3 = $863.84
Present value of the bond = $1073.96 + $863.84 = $1937.80

Using the formula for duration, we get:

Duration = ($70*1 + $70*2 + $1070*3)/$1937.80 = 4.31 years

Therefore, the best choice is B, as it is the only option that matches the calculated duration.

What Is the Duration of This Bond