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Exercise

AAdmin
Nov 20'23

Answer

Solution: A

Because the interest rate is greater than zero, the Macaulay duration of each bond is greater than its modified duration. Therefore, the bond with a Macaulay duration of c must be the bond with a modified duration of a and a = c/(1 + i) which implies 1 + i = c/a. The Macaulay duration of the other bond is b(1 + i) =bc/a.

Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.

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