CA Final · Advanced Financial Management · Security Valuation
Surya Infra Ltd has issued a 3-year bond with face value ₹100, a 10% annual coupon and redemption at par. The bond is priced at par, with a yield to maturity of 10%. What is its Macaulay duration (to two decimals)?
The Macaulay duration is about 2.74 years. Discount each cash flow at 10%, giving present values of 9.09, 8.26 and 82.64, which total 100. Multiply each by its year, sum to 273.55, and divide by the price of 100. Weighting undiscounted cash flows would give a wrong figure.
- A2.74 yearsCorrect
- B2.77 years
- C3.00 years
- D2.00 years
Explanation
The present values are 9.0909, 8.2645 and 82.6446 for years 1, 2 and 3, totalling 100. Weighted times: 9.0909×1 + 8.2645×2 + 82.6446×3 = 273.55. Duration = 273.55 / 100 = 2.74 years. The figure 2.77 comes from weighting undiscounted cash flows, which is wrong.
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