Explanation:
Step 1: Calculate the total present value of cash flows
Total PV = 3.7 + 4.9 + 22.3 = 30.9 USD Mn
Step 2: Calculate the Macaulay Duration
Macaulay Duration = (1 × 3.7/30.9) + (2 × 4.9/30.9) + (3 × 22.3/30.9) = 0.1197 + 0.3172 + 2.1650 = 2.60 years
Step 3: Calculate the Modified Duration
Modified Duration = Macaulay Duration / (1 + YTM) = 2.60 / 1.06 = 2.45 years
Q.3548 You have been provided the following information on a bond:
| Period | PV of cash flow (USD Mn) |
|---|---|
| 1 | 3.7 |
| 2 | 4.9 |
| 3 | 22.3 |
If the yield to maturity is 6%, then what is the modified duration of the bond?
A
2.45 years
B
2.65 years
C
2.30 years
D
2.25 years
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