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What is the duration of a 14% coupon bond making annual coupon payments if it has three years...

Question:

What is the duration of a 14% coupon bond making annual coupon payments if it has three years until maturity and a yield to maturity of 9%?

Bond Duration:

One way to measure a bond's interest rate risk is the Macaulay duration. This statistics indicates the percentage change in bond price for a given one percentage change in the bond's yield to maturity.

Answer and Explanation:

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The duration of the bond is 2.67.

We can use the following formula to compute the Macaulay duration:

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Interest Rate Risk: Definition, Formula & Models

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Chapter 3 / Lesson 6
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Interest rate risk is really the risk of two different events (price reduction and reinvestment rate reduction) caused by a change in interest rates. Interest rate risk affects bond investments, but the good news for bond investors is that it can be mitigated or eliminated.


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