A corporate bond returns 12 percent of its cost (in PV terms) in the first year, 11 percent in the second year, 10 percent in the third year and the remainder in the fourth year. What is the bond's duration in years?

3.32 years

Explanation:

The remainder return in the fourth year will be calculated as:

= 1 - 0.12 - 0.11 - 0.10

= 0.67

Year 1:

Return = 12% = 0.12

Year × Return = 1 × 0.12 = 0.12

Year 2

Return = 11% = 0.11

Year × Return = 2 × 0.11 = 0.22

Year 3

Return = 10% = 0.10

Year × Return = 0.30

Year 4

Return = 0.67

Year × Return = 2.68

Bond's duration = 0.12 + 0.22 + 0.30 + 2.68 = 3.32 years

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