Beta,Inc.has bonds outstanding that mature in 10 years.The bonds have $1,000 par value and pay interest annually at a rate of 10%,which is also the current required rate of return on the bonds.The bonds' duration is:

Question

Quizplus · Accepted Answer

The duration of the bond can be calculated using the formula:

Duration = (Present value of bond's cash flows weighted by the time until receipt) / Bond's current market price

Since the bond's required rate of return is the same as its coupon rate, the bond's price will be equal to its par value of $1,000.

Using the formula:

Duration = [(Time until receipt of each cash flow * Present value of the cash flow)/ Bond price]

Duration = [(1*1000*(0.1)) + (2*1000*(0.1/(1+0.1)^2)) + ... + (10*1000*(0.1/(1+0.1)^10))] /1000

Duration = 6.76

Therefore, the correct choice is B.

Beta,IncHas Bonds Outstanding That Mature in 10 Years