What is the Macaulay duration of a 7.8% coupon bond with eight years to maturity and a current price of $944.70?
What is the modified duration?
Macaulay duration is determined by dividing the time-weighted present value of the bond's cash flow from the present value of its the bond or its current price. It is commonly used by portfolio managers who used an immunization strategy as these strategies effectively protect the firm's bond portfolio from the interest rates fluctuations.
Answer and Explanation:
Formula of the macaulay duration:
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fromChapter 3 / Lesson 6
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.