Question
Which of the following is true about Duration of a
bond?Solution
Duration is used to indicate the volatility of bond prices to changes in interest rates. The bond holder can, thus, determine the sensitivity of the price of bond to changes in interest rates, once he has calculated the duration of the bond. It is also a technique used to measure the length of the stream of payment associated with a bond investment. It is the weighted average of the cash flow streams where the weights are defined in terms of present value. Thus, for a coupon bond, the duration will be less than maturity and for zero coupon bond it will be equal to maturity. it is the  weighted average of the cash flow streams, where the weights are defined in terms of present value
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