The duration of a par-value bond with a coupon rate of 8% (paid annually) and a remaining time to maturity of 5 years is

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The duration of a bond is a measure of the sensitivity of its price to changes in interest rates, incorporating the present value of all future cash flows (coupon payments and the repayment of the principal). For a bond with an 8% annual coupon rate and 5 years to maturity, the duration will be less than its maturity because the bondholder receives some payments (the coupons) before the bond's maturity. The correct calculation involves discounting each of the bond's cash flows by an appropriate discount rate and then calculating the weighted average time until those cash flows occur. The exact duration of 4.31 years indicates that, on average, the bond's cash flows are received earlier than the bond's maturity, reflecting the time value of money and the impact of the bond's cash flows on its price sensitivity to interest rate changes.

The Duration of a Par-Value Bond with a Coupon Rate