Question

You just started work at a wealth management firm and your boss asks you to evaluate a 6-year bond with a face value of $1,000 that, according to the prospectus, you can purchase next month (01-October-2018) when it is initially issued. The bond is designed to provide a 5.9% yield-to- market (YTM) and makes annual 01 October coupon payments. The underwriter has stated the issuer’s intention to sell the bonds at face value (par) and your plan is purchase the bonds accordingly for $1,000 apiece, meaning the coupon and the YTM will be the same on the date of sale.

What is the duration stated in years on October 2, 2021, two days after the sale (i.e., the new buyer has already received the October 1, 2021 coupon payment)? (Hint: At this point, there are 3 years until maturity, so the duration must be less than or equal to that amount.)

A. 2.84 years

B. 2.68 years

C. 2.50 years

D. 1.96 years

E. 1.42 years

Answer 1

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