Question

11- What is the duration gap for an investor with a year horizon who invests in...

11- What is the duration gap for an investor with a year horizon who invests in a bond with a duration of 10?

  1. 2
  2. 0
  3. -2
  4. None of answers

13- A fixedbond has a Macaulay Duration of 10. Which of the following could possibly be the band's Modified Duration?

  1. 12
  2. None of answers
  3. 11
  4. 7

14- A income portfolio is invested equally among three zero coupon bonds with maturities of 3 years, years, and 10 years. What is the estimated Macaulay duration of the portfolio?

  1. 5.33
  2. 7.25
  3. None of answers
  4. 6
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Answer #1

Q. 11). Answer :- Option C). - 2.

Explanation :- Bond having duration of 10 will have negative duration gap because the investment horizon (for investor to invest in bond) will be more than its duration (Macaulay duration). Therefore, negative 2 represents the correct duration gap in the given question.

Q. 13). Answer :- Option D). 7

Explanation :- Modified duration will be equal to or lesser than (but can not be greater than) the Macaulay duration. Accordingly, 7, being lesser than Macaulay duration of 10, represents to correct modified duration in the given question. Therefore, Option D is correct answer to the given question.

Q. 14). Answer :- Option D). 6

Explanation :- Macaulay duration = Average of maturity period of all bonds.

= (3 + 5 + 10) / 3

= 18 / 3

= 6.

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