What is the duration of a 4-year bond with an annual coupon rate of 10%,
Maturity value of $1,000, and yield to maturity of 8%?

Question

Quizplus · Accepted Answer

The duration of a bond is a measure of the sensitivity of its price to changes in interest rates, which incorporates the present value of all future cash flows (coupon payments and the final principal repayment) weighted by the time until those cash flows occur. The correct duration for a 4-year bond with a 10% annual coupon rate, a maturity value of $1,000, and a yield to maturity of 8% can be calculated using the formula for Macaulay duration or through financial calculators or software designed for such financial analysis. The calculation involves discounting each of the bond's cash flows back to their present value at the given yield to maturity, multiplying each present value by the time until the cash flow occurs, summing these products, and then dividing by the price of the bond. The correct answer, 3.51, reflects the bond's sensitivity to interest rate changes, indicating that on average, the bond's cash flows are received 3.51 years into the future.

What Is the Duration of a 4-Year Bond with an Annual