CA Final · Advanced Financial Management · Security Valuation
A 6-year zero-coupon bond is trading in the market at a yield to maturity of 8% per annum. What is its Macaulay duration?
The Macaulay duration is 6 years. A zero-coupon bond makes one payment, at maturity, so the weighted average time to receive its cash flows equals its residual maturity. The yield level does not change this, whereas coupon bonds have a duration shorter than maturity.
- A6 years, equal to its residual maturityCorrect
- BLess than 6 years, because the yield is positive
- CMore than 6 years, because there is a single large payment
- D3 years, being half of the maturity
Explanation
A zero-coupon bond has only one cash flow, received at maturity. The weighted average time of its cash flows is therefore the maturity itself. The Macaulay duration is 6 years whatever the yield. Only a coupon-paying bond has a duration shorter than its maturity.
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