Chartered Financial Analyst Level 1

Get started today

Ultimate access to all questions.

Explanation:

The correct answer is A (1.72). The approximate modified duration of a bond is calculated as:

$\text{ApproxModDur} = \frac{(PV_{+}) - (PV_{-})}{2 \times (\Delta \text{Yield}) \times PV_0}$

Substituting the given values:

$\text{ApproxModDur} = \frac{103.40 - 100.95}{2 \times 0.0070 \times 101.80} = \frac{2.45}{1.4252} = 1.7191 \approx 1.72$

Option B (2.25) is incorrect because it omits the higher yield/lower price from the calculation and the multiplication by 2 in the denominator. Option C (3.44) is incorrect because it omits the number 2 from the denominator entirely.

Explanation:

The correct answer is A (1.72). The approximate modified duration of a bond is calculated as:

$\text{ApproxModDur} = \frac{(PV_{+}) - (PV_{-})}{2 \times (\Delta \text{Yield}) \times PV_0}$

Substituting the given values:

$\text{ApproxModDur} = \frac{103.40 - 100.95}{2 \times 0.0070 \times 101.80} = \frac{2.45}{1.4252} = 1.7191 \approx 1.72$

Comments (0)

No comments yet.

An analyst observes the following price-yield relationship for an option-free bond: Price per 100 of Par Value | Yield to Maturity 100.95 | 7.45% 101.80 | 6.75% 103.40 | 6.05% If the bond trades at 101.80 per 100 of par value, its approximate modified duration is closest to:

Exam-Like

1.72.

71.4%

2.25.

14.3%

3.44.

14.3%