USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are creating a portfolio that consists of the following two bonds. Bond A pays an annual 7 percent coupon, matures in two years, has a yield to maturity of 8 percent, and a face value of $1,000. Bond B pays an annual 8 percent coupon, matures in three years, has a yield to maturity of 9 percent, and a face value of $1,000.
-Refer to Exhibit 13.14. Calculate the Modified Duration for Bond A.
A) 0.98
B) 1.79
C) 1.90
D) 1.93
E) 2.31

Question

Quizplus · Accepted Answer

The Modified Duration is calculated using the formula: Modified Duration = Macaulay Duration / (1 + YTM/n). For Bond A, the Macaulay Duration is approximately 1.93 years, and the YTM is 8%. Therefore, Modified Duration = 1.93 / (1 + 0.08/1) = 1.79.