USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are creating a portfolio that consists of the following two bonds. Bond A pays an annual 7 percent coupon, matures in two years, has a yield to maturity of 8 percent, and a face value of $1,000. Bond B pays an annual 8 percent coupon, matures in three years, has a yield to maturity of 9 percent, and a face value of $1,000.
-Refer to Exhibit 13.14. Calculate the Macaulay Duration for Bond A.
A) 0.98
B) 1.79
C) 1.90
D) 1.93
E) 2.31

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 (coupons and 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 2-year maturity, a yield to maturity of 8%, and a $1,000 face value, 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 average time it takes to be repaid by the bond's cash flows.