Question

Asked Dec 6, 2019

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- An organization purchased a four-year $10,000 bond paying a 7% annual coupon and interest rates (for present value purposes are currently at 4%. This works out to a present value of the payment streams of $673.08 + $647.19 + $622.30 + $9,146.40 = $11,088.97, which is the market price of the bond. What is the duration of this bond?

- 75 years
- 65 years
- 75 years
- 0 years

Step 1

Duration of a bond measures the interest rate sensitivity of the bond. However, Macaulay duration measures the number of years it takes to repay the investors the price of the bond. It takes the cash flows in the form of coupon and redemption value at the end of the maturity period.

Step 2

Duration of the bond is calculated as below:

Here, r = yield to maturity = 4%

Step 3

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