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CFA Level I · CFA Level I Exam · Yield-Based Bond Duration Measures and Properties

A zero-coupon bond has 8 years to maturity and a yield-to-maturity of 5% with annual compounding. Its modified duration is closest to:

Modified duration is about 7.62. A zero-coupon bond's Macaulay duration equals its 8-year maturity, and dividing by one plus the 5% annual yield gives 7.62. Using 8.00 would ignore the adjustment, and multiplying by 1.05 gives the wrong direction.

  1. A7.62Correct
  2. B8.00
  3. C8.40

Explanation

For a zero-coupon bond, Macaulay duration equals maturity, 8.00. Modified duration = 8.00 / (1 + 0.05) = 7.619, or about 7.62. Choosing 8.00 ignores the yield adjustment, and 8.40 multiplies by (1.05) instead of dividing.

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