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CA Final · Advanced Financial Management · Security Valuation

Tulsi Infra Ltd. has issued a zero-coupon bond with a residual maturity of 6 years. The market yield is 10% per annum compounded annually. What is the Macaulay duration of this bond?

The Macaulay duration is 6.00 years. A zero-coupon bond pays only one cash flow, at maturity, so the weighted average time of receipt is simply the residual maturity. Dividing by 1.10 would give modified duration, which measures price sensitivity rather than time.

  1. A6.00 yearsCorrect
  2. B5.45 years
  3. C3.00 years
  4. D6.60 years

Explanation

A zero-coupon bond makes a single cash flow at maturity, so its weighted average time to cash flow equals its maturity, which is 6 years. The 5.45 years figure (6/1.10) is the modified duration, not the Macaulay duration. The yield level does not change the Macaulay duration of a zero-coupon bond.

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