Exercise
Dec 05'23
Answer
Solution: C
Duration = (1 + 2 + 3 + 4)/4 = 2.5 years
References
Lo, Andrew W.; Wang, Jiang. "MIT Sloan Finance Problems and Solutions Collection Finance Theory I" (PDF). alo.mit.edu. Retrieved November 30, 2023.
Yankee Inc. has sold the Super Coupon Absolute Marvel (SCAM) security to raise new funds. Unlike ordinary bonds, it pays no par value/face value at the end of its life. It only pays coupons every year as follows: $100(1 + 0.05) at the end of year one, $100(1 + 0.05)2 at the end of year two, and so on. This security lasts for 4 years (i.e., makes 4 payments). The current interest rate is 5% for all maturities.
What is the duration today of SCAM?
References
Lo, Andrew W.; Wang, Jiang. "MIT Sloan Finance Problems and Solutions Collection Finance Theory I" (PDF). alo.mit.edu. Retrieved November 30, 2023.
Solution: C
Duration = (1 + 2 + 3 + 4)/4 = 2.5 years
References
Lo, Andrew W.; Wang, Jiang. "MIT Sloan Finance Problems and Solutions Collection Finance Theory I" (PDF). alo.mit.edu. Retrieved November 30, 2023.