Suppose the duration of a bond portfolio is 2. This means
A) The final cash flow from the portfolio will occur in two years.
B) The weighted-average maturity of the portfolio's cash flows is 2 years.
C) The portfolio is fully equivalent to a 2-year zero-coupon bond.
D) The portfolio is fully equivalent to a 2-year par-coupon bond.

Question

Quizplus · Accepted Answer

The duration of a bond portfolio is the weighted average of the maturity of all the cash flows in the portfolio. Therefore, if the duration of the portfolio is 2, it means the weighted-average maturity of the cash flows in the portfolio is 2 years, and not that the final cash flow will occur in two years (option A), or that the portfolio is fully equivalent to a 2-year zero-coupon bond (option C) or a 2-year par-coupon bond (option D).

Suppose the Duration of a Bond Portfolio Is 2