CA Final · Advanced Financial Management · Security Valuation
Narmada Finance Ltd. holds a 2-year bond of face value Rs 100 with a 10% annual coupon, redeemable at par. The bond is priced at par, so the YTM is 10%. What is its Macaulay duration?
The Macaulay duration is about 1.91 years. Discount the coupon of Rs 10 and the final Rs 110 at 10%, weight each year by its present value over the price of Rs 100, and sum. The coupon in year one pulls duration below the 2-year maturity.
- A1.91 yearsCorrect
- B1.74 years
- C2.00 years
- D1.50 years
Explanation
PV of year 1 cash flow = 10/1.10 = 9.0909; PV of year 2 cash flow = 110/1.21 = 90.9091; total = 100. Duration = (1 x 9.0909 + 2 x 90.9091)/100 = 190.909/100 = 1.91 years. The figure 1.74 is the modified duration (1.9091/1.10), which is a different measure. 2.00 ignores the coupon timing.
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