CFA Level II ExamFixed IncomeEasy
A fixed-income analyst is evaluating a non-callable, option-free corporate bond with a 6-year maturity, a 5% semiannual coupon rate, and a yield to maturity (YTM) of 4.5%. The analyst wants to calculate the bond's modified duration. Which of the following inputs is NOT directly required for the calculation of modified duration?
- ABond's credit rating
- BNumber of periods to maturity
- CCoupon payments
- DYield to maturity (YTM)
Show answer & explanationAnswer & explanation
Correct answer: A. Bond's credit rating
Modified duration is a measure of a bond's interest rate sensitivity and is calculated using the bond's Macaulay duration and its yield to maturity. The bond's credit rating, while important for credit risk analysis, is not a direct input in the modified duration formula.
Why the other options are wrong
- B. The number of periods to maturity is necessary to calculate the Macaulay duration.
- C. Coupon payments are necessary to calculate the Macaulay duration, which is a component of modified duration.
- D. Yield to maturity is a direct input in the modified duration formula.
Modified Duration Calculation
Modified duration measures the price sensitivity of a bond to a change in its yield to maturity, assuming the cash flows do not change.
- It is derived from Macaulay duration.
- It requires coupon payments, YTM, and periods to maturity.
- It does not directly use credit rating or market price as inputs for its calculation.
Memory trick: My Duration Needs Yield and Coupons, Not Credit.