A 9%, 16-year annual pay bond has a yield to maturity of 11% and Macaulay duration of 9

THE CORRECT ANSWER IS AS FOLLOWS :-

Step-by-step explanation

PART - 1)

EFFECT OF FALL IN YIELDS ON BOND PRICE

A FALL IN YIELD OF BOND WILL LEAD TO A INCREASE IN PRICE OF THE BOND SINCE THE EXPECTATION OR REQUIRED RATE FALLS AND HENCE THE CASH FLOWS ARE TO BE DISCOUNTED AT LOWER YTM , LEADING TO HIGHER PRICE .

PART - 2)

WHY IS DURATION OF BOND LOWER THAN MATURITY

THE DURATION OF BOND IS GENERALLY LOWER THAN THE MATURITY SINCE THE CASH-FLOW IN FORM OF INTEREST OR COUPONS ARE RECEIVED BEFORE THE MATURITY OF BOND HENCE THE DURATION OF A COUPON PAYING BOND IS LOWER THAN MATURITY SINCE. CASHFLOWS OCCUR BEFORE THE MATURITY OF BOND ALSO .