The CashFlow Challenge

Duration of Zero Coupon Bonds

Question

What is the Duration and Modified Duration of a zero-coupon bond due in 19 years if current yield is 5.5%?

Here's the Answer

Answer

The Duration of a zero-coupon bond is always equal to its maturity in years.

Therefore, Duration = (-) 19  (Duration is always a negative number)

Modified Duration = Duration /(1 + (annual yield/2)) = ­ 18.4915.

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