Valuing Bonds with Present Value Formula
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Questions and Answers

What is the annual Macaulay duration of the IBM bond?

  • The weighted average of the number of years until each cash flow is to be paid (correct)
  • The present value of each cash flow as a percentage of the bond’s full value
  • The average time it takes for the bond to reach its full value
  • The sum of all cash flows until the bond's maturity

    • How is modified duration (ModDur) calculated?

  • Macaulay duration divided by one plus the bond’s yield to maturity (correct)
  • Macaulay duration minus the bond’s yield to maturity
  • Macaulay duration added to the bond’s yield to maturity
  • Macaulay duration multiplied by the bond’s yield to maturity

    • What does a bond's annual Macaulay duration measure?

  • The present value of all future cash flows
  • Interest rate risk or sensitivity of a bond’s full price to a change in its yield (correct)
  • The total value of the bond's cash flows
  • The annual interest payment on the bond

    • When is a bond sold at a premium?

    <p>When its coupon rate is higher than the yield to maturity</p> Signup and view all the answers

    What happens to a bond's price when there is a 1% increase in yield to maturity?

    <p>It decreases approximately by modified duration percentage</p> Signup and view all the answers

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