Duration is a very important concept that allows investors to better understand the risk of owning a particular bond. For example, we are interested in buying a three-year bond with a $1,000 face value, a 4% coupon (paid annually) and a 5% yield to maturity.

How long should I hold the bond to earn the 5% YTM I thought I would get when I bought the bond?

2.88 years

I should hold to maturity (or 3 years)

2.90 years

2.84 years

2.86 years

If market yields were to rise by 40 basis points, what price change would you expect in the bond discussed above, using the formula for modified duration in your calculation?

- $11.68

- $12.98

- $13.54

- $10.67

Assume that shortly after you bought the bond noted above, (a three-year bond with a $1,000 face value, a 4% coupon (paid annually) and a 5% yield to maturity), market yields fall to 3%. If you hold the bond to maturity and market yields remain at 3% until the bond matures, what yield will you actually realize on your bond investment?

4.92%

5.25%

It is impossible to calculate the answer to this question.

5.40%

4.36%