Question

What is the duration of a zero coupon bond with five years to maturity that is currently priced at $980 and has an interest rate of 8%?

Select one:
a. 10 years
b. 4.86 years
c. cannot be determined with the information provided.
d. 5 years
e. 2.5 years

Answer 1

The duration of a zero coupon bond is equal to its time to maturity, so for a zero coupon bond with five years to maturity, the duration is 5 years.

Step-by-step explanation:

The question asks about determining the duration of a zero coupon bond with five years to maturity. The duration of a zero coupon bond is equal to its time to maturity, which in this case is 5 years. A zero coupon bond does not pay periodic interest, making its duration equal to its maturity since the only cash flow occurs at the bond's maturity, which factors into the bond's price. Therefore, the bond priced at $980 with an interest rate of 8% and five years to maturity has the duration option of 5 years.