Hi,
How do we know that bond A has the same effective duration? I don’t see the logic here.
Thanks in advance!
Q from question practice pack CFA website
Are you sure? I remember this information from another quesiton.
Duration is measured in years.
Bond A is non-callable 1-year
Macaulay Duration = the weighted average number of years to maturity of cash flows.
What is the Macaulay Duration of a Bond A?
Answer: if there’s only 1 coupon (at maturity) it will be 1 year;
if there are 2 coupons a year, it will be less than 1
How is Modified Duration related to Macaulay Duration?
Modified Duration = Macaulay Duration / (1 + YTM/n)
YTM = yield to maturity
n = number of coupon periods per year.
The Modified Duration of Bond A will be less than 1
Bond A is a non-callable 1 year bond, so its effective duration will be the same as its modified duration.
The Effective Duration of Bond A will be less than 1.
How can a 1 year non-callable bond have an effective duration of 7.48621?
My guess would be that somehow parts of 2 different questions have been mixed together.
.
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Thank you. I might ask the support then to review this question 
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