Macaulay's duration:
A) is a weighted average of the time until cash flows are received.
B) is always greater than maturity.
C) is never equal to maturity.
D) directly indicates how much the price of a security will change given a change in interest rates.
E) estimates when embedded options will be used.

Question

Quizplus · Accepted Answer

Macaulay's duration is a measure of the average time it takes to receive cash flows from a bond (including interest and principal payments), weighted by the present value of those cash flows. It is a useful tool for estimating the sensitivity of a bond's price to changes in interest rates. Therefore, choice A, which states that Macaulay's duration is a weighted average of the time until cash flows are received, is the correct answer. Choice B is incorrect, as duration can be equal to, greater than, or less than maturity, depending on the characteristics of the bond. Choice C is also incorrect, as duration can be equal to maturity in some cases. Choice D is partially correct, as duration can help estimate how a bond's price will change in response to changes in interest rates, but it is not a direct indicator. Choice E is incorrect, as duration is not used to estimate when options will be exercised.

Macaulay's Duration