Question

A four-year maturity deep discount coupon corporate bond with a required rate of return
(YTM) of 12 percent has a Macaulay duration of ________ years. ( show your work clearly )

A.3.05

B.2.97

C.3.22

D.3.71

E. 4.00

Answer 1

Since the Deep discount bonds and zero coupon bonds are similar in the sense that both the instruments do not pay coupon interest. ... The difference between the issue price and face value is treated as interest in the case of deep discount bonds while the same difference is treated as capital gains in the case of zero coupon bonds.

And

Duration of zero coupon bonds is equal to maturity

Hence Duration of deep discount bonds is equal to maturity that is 4 year hence option E with duration 4 is Correct option