Chapter 11, Problem 5PS

Summary Introduction

To determine:

Which one of the following (bond selling at par, premium bond, zero coupon bonds or Non of the above) reflects that Macaulay's duration stands to be less when compared with modified duration

Introduction:

Macaulay duration refers to the weighted average term pertaining to the maturity of bond's cash flow. The weight associated with the cash flow is ascertained by dividing a cash flow's present value by price. The portfolio manager that makes use of the strategy of immunization takes Macaulay duration into consideration frequently. Modified duration reflects the changes in the securities value with change in the rate of interest. It works on the concept that the bond price and rate of interest move in reverse direction