Suppose the duration of a bond portfolio is 2.This means
A)The final cash flow from the portfolio will occur in two years.
B)The weighted-average maturity of the portfolio's cash flows is 2 years.
C)The portfolio is fully equivalent to a 2-year zero-coupon bond.
D)The portfolio is fully equivalent to a 2-year par-coupon bond.

Question

Quizplus · Accepted Answer

Duration is a measure of the sensitivity of a bond portfolio's price to changes in interest rates. A duration of 2 means that the weighted-average maturity of the portfolio's cash flows is 2 years. Therefore, choice B is the best answer. Choice A is incorrect because the final cash flow from the portfolio depends on the individual bonds in the portfolio, not the duration. Choices C and D are incorrect because a bond portfolio's duration is not the same as the maturity or coupon rate of a single bond.

Suppose the Duration of a Bond Portfolio Is 2