Exhibit 16-10
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
You are creating a portfolio that consists of the following two bonds. Bond A pays an annual 7% coupon, matures in two years, has a yield to maturity of 8%, and a face value of $1,000. Bond B pays an annual 8% coupon, matures in three years, has a yield to maturity of 9%, and a face value of $1,000.
-Refer to Exhibit 16-10. Calculate the Macaulay Duration for Bond A.

Question

Quizplus · Accepted Answer

The Macaulay Duration for Bond A can be calculated using the formula for Macaulay Duration, which takes into account the present value of all cash flows (coupon payments and the final principal repayment) weighted by the time until each cash flow occurs, divided by the current bond price. For Bond A, with a 7% annual coupon, a yield to maturity of 8%, a face value of $1,000, and maturing in 2 years, the calculation involves discounting each cash flow by the yield to maturity and then finding the weighted average time of these cash flows. The correct calculation results in a Macaulay Duration close to 1.93 years, indicating the weighted average time it takes to receive the bond's cash flows.

Exhibit 16-10 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)