Skip to contentSkip to search
Sign inRegister

ACCA AFM · Guided practice (Show me how)

Chapter 11: The Valuation of Debt Finance, the Macaulay Duration and the Modified Duration

Macaulay duration, modified duration and bond price sensitivity

Interest is paid annually and the next payment is due in one year. Round each annual present value to two decimal places before summing, and round durations to two decimal places before using them.

(a) Bond A. A company has 8% bonds in issue, redeemable in 5 years at a premium of 10%. The current market value is $98.63 per $100 nominal. Identify the gross redemption yield and calculate the Macaulay duration.

(b) Bond B. Another bond pays the same coupon and redemption premium, but is redeemable in 10 years and is quoted at $91.61 per $100 nominal. Its gross redemption yield is the same as A's. Calculate its Macaulay duration.

(c) Calculate the modified duration for bond A.

At the investors' required yield the published present-value factors for consecutive annual dates, starting at year 1, are: 0.909, 0.826, 0.751, 0.683, 0.621, 0.564, 0.513, 0.467, 0.424, 0.386.

  1. (a) yield and Macaulay duration

    Identify the gross redemption yield and calculate the Macaulay duration of bond A.

  2. (b) a longer bond

    Calculate the Macaulay duration of bond B.

  3. (c) modified duration

    Calculate the modified duration of bond A and explain its use in estimating price sensitivity.

Opening this exercise…