A semiannual payment bond with a $1,000 par has a 7 percent quoted coupon rate,a 7 percent promised YTM,and 10 years to maturity. What is the bond's duration?

Question

Quizplus · Accepted Answer

The bond's duration can be calculated using the formula for Macaulay duration for bonds paying periodic interest. Since the bond's coupon rate equals its yield to maturity (YTM), and it pays semiannually, the bond's duration will be less than its maturity but not as low as the modified duration would suggest. The correct duration for a bond like this, given the parameters, is closer to its weighted average time to cash flows, which in this case is 7.35 years. This takes into account the time value of money and the fact that the bond pays interest semiannually.

A Semiannual Payment Bond with a $1,000 Par Has a 7