A 15-year $1,000 par value bond with semi-annual coupon payments has the following characteristics: Coupon Rate and Yield-to-Maturity equal 8%.What is the bond's effective duration estimated for a 50 basis point change in interest rates?

Question

Quizplus · Accepted Answer

Effective duration can be estimated using the formula for Macaulay duration for bonds with coupon payments, especially when the coupon rate equals the yield to maturity. In this case, the bond's Macaulay duration is approximately equal to its time to maturity when the coupon rate equals the yield to maturity, making the effective duration slightly less due to the semi-annual coupon payments. For a 15-year bond with semi-annual payments, the effective duration is slightly less than its maturity, leading to an answer close to but less than 15, which is 8.65 in this case.

A 15-Year $1,000 Par Value Bond with Semi-Annual Coupon Payments