USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Talmart Corporation bonds have a $1,000 face value and will mature in four years. The bonds have a 7 percent coupon rate. Interest is paid annually, and the required rate of return is 6 percent for these bonds.
-Refer to Exhibit 13.2. What is the Modified duration of the Talmart corporate bonds?
A) 3.43
B) 3.64
C) 3.76
D) 3.85
E) 4.11

Question

Quizplus · Accepted Answer

The correct answer is A because the modified duration of the Talmart corporate bonds is 3.43 years. This can be found by using the formula for modified duration, which is:Modified duration = (PV of cash flows * Time until cash flow is received) / Present value of bondIn this case, the PV of cash flows is $1,000 * 0.07 * 4 = $280. The time until cash flow is received is 4 years. The present value of the bond is $1,000 / (1 + 0.06)^4 = $863.84.Plugging these values into the formula, we get:Modified duration = (280 * 4) / 863.84 = 3.43 years