For an investment, what is the weighted average time to maturity considered as ___________?
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Answer: D. duration
Explanation
Duration represents the weighted average time until an investment cash flows are received by the investor. This metric accounts for the timing and magnitude of all coupon and principal payments over the security life. Financial analysts use duration to measure how long funds remain tied up in a fixed income investment. Macaulay duration calculates the weighted average term to maturity of a bond cash flow stream. Expressed in years, duration provides a superior measure of bond price sensitivity compared to simple maturity alone. Zero coupon bonds have a duration equal exactly to their maturity because there are no intermediate cash flows.
Premium time is a fabricated financial term that does not describe weighted average cash flow timing. Standard time is a general colloquialism unrelated to formal quantitative fixed income pricing metrics. Mean time is an imprecise statistical descriptor rather than the specific financial term known as duration.
- Subject
- Accounting and Finance
- Category
- Finance
- Topic
- —
- Difficulty
- medium
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