2016-FRR Exam Dumps | Which one of the following statements describes Macauley's duration?

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Question 103

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Question 103/145

Which one of the following statements describes Macauley's duration?

A. The change in value of a bond when yields increase by 1 basis point.

B. The weighted average life of the bond payments.

C. The present value of the future cash flows of a bond calculated at a yield equal to 1%.

D. The percentage change in a bond price when the yields change by 1%.

Correct Answer: B

Macaulay's duration is a measure of the weighted average time until a bond's cash flows are received. It calculates the time it takes for the price of a bond to be repaid by its internal cash flows. This measure is essential because it helps investors understand the interest rate risk of a bond. The longer the duration, the more sensitive the bond's price is to changes in interest rates. Therefore, Macaulay's duration is crucial for managing interest rate risk and is commonly used in bond portfolio management.

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