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    Question

    Which of the following is true about Duration of a

    bond?
    A The duration of a bond is always equal or less than its maturity Correct Answer Incorrect Answer
    B For a zero coupon bond, duration equals its maturity. Correct Answer Incorrect Answer
    C Duration is used to indicate the sensitivity of bond prices to changes in interest rates Correct Answer Incorrect Answer
    D A and B Correct Answer Incorrect Answer
    E All of the above Correct Answer Incorrect Answer

    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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