NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Fixed Income Securities
A bond's Macaulay duration is 4.0 years and its yield to maturity is 10% per annum with annual compounding. What is its modified duration (to two decimals)?
Modified duration is 3.64. It equals Macaulay duration divided by one plus the periodic yield, so 4.0 divided by 1.10 gives about 3.64. Multiplying instead of dividing, or ignoring the adjustment, produces the other values, which are incorrect.
- A3.64Correct
- B4.40
- C4.00
- D3.60
Explanation
Modified duration = Macaulay duration / (1 + y) = 4.0 / 1.10 = 3.636, i.e. 3.64. Multiplying by 1.10 gives 4.40, which is the wrong direction. Using 4.0 ignores the adjustment, and 3.60 is a rounded subtraction of the yield that has no basis.
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