CFA CFA Level 1 Question of the Week – Fixed Income

Question of the Week – Fixed Income

  • This topic has 3 replies, 3 voices, and was last updated Aug-18 by AdaptPrep.
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    • AdaptPrep
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      Ron Wong has a portfolio with two zero-coupon bonds. One pays $100 at time 1. The other pays $500 at time 2. The market value of Ron’s portfolio is $504.13. The Macaulay duration of Ron’s portfolio is closest to:

      • 1.7
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      • 1.9
    • rsparks
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      It’s just the time weighted yield to maturity for each of the zero coupon bonds right? 

    • vievkgoel
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    • AdaptPrep
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      First, we must calculate the cash flow yield. This statistic is calculated just like the IRR:
      504.13 = 100 / (1 + r) + 500 / (1 + r)^2
      r = 10%
      The Macaulay duration is the weighted average of time to receipt of each payment, discounted at the cash flow yield:
      MacDur = [1(100) / 1.1 + 2(500) / 1.1^2] / (100 / 1.1 + 500 / 1.1^2) = 1.82
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