A bond that has an annual coupon rate of 15% has two years to maturity. If the current discount rate is 8%, what is the bond's Macaulay's duration?
A) 2.00 years
B) 1.99 years
C) 1.88 years
D) 1.77 years
E) 1.66 years

Question

Quizplus · Accepted Answer

Macaulay's duration is a measure of the weighted average time until a bond's cash flows are received. It is calculated by taking the present value of each cash flow, multiplying each by the time until receipt, summing these products, and then dividing by the price of the bond. For a bond with a 15% annual coupon rate, two years to maturity, and a current discount rate of 8%, the calculation involves discounting the cash flows (which include annual coupon payments and the final principal payment) and then applying the formula for Macaulay's duration. The correct calculation results in a duration shorter than the bond's total maturity, reflecting the impact of the relatively high coupon payments. The exact calculation would show that the duration is closer to 1.88 years, taking into account the present value of the cash flows and their respective times.

A Bond That Has an Annual Coupon Rate of 15