CFA Level I · CFA Level I Exam · Interest Rate Risk and Return
A bond has a Macaulay duration of 7.20 years and a yield to maturity of 5.00% per year with annual compounding. Its modified duration is closest to:
Modified duration is Macaulay duration divided by one plus the periodic yield. Here 7.20 divided by 1.05 equals about 6.86. Multiplying by 1.05 gives 7.56, which is the wrong direction, and 7.20 skips the adjustment altogether.
- A6.86Correct
- B7.20
- C7.56
Explanation
ModDur = MacDur / (1 + y) = 7.20 / 1.05 = 6.857, or about 6.86. The 7.56 figure multiplies by (1 + y) instead of dividing. The 7.20 figure ignores the yield adjustment.
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