- CFA Exams
- CFA Level I Exam
- Study Session 15. Fixed Income (2)
- Reading 46. Understanding Fixed-Income Risk and Return
- Subject 7. Interest Rate Risk and the Investment Horizon

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**CFA Practice Question**

An investor purchases a 10-year, 8% annual coupon bond with exactly seven years remaining until maturity. The purchase price is equal to par value. The investor's investment horizon is five years. The modified duration of the bond is 5.5 years. The duration gap at the time of purchase is

*closest*to ______.A. 0.5

B. 0.94

C. 2

**Explanation:**The Macaulay duration is modified duration x 1.08 = 5.94. The duration gap is 5.94 - 5 = 0.94.

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**User Contributed Comments**
5

User |
Comment |
---|---|

berns23 |
Please explain where the 5 comes from. thnx |

prahlad |
the investment horizon |

moupad123 |
How do we know that 8% is the Cr and not the I/Y |

cschulz316 |
because it's at par? |

Sagarsan88 |
A very good qstn |