Why a Callable Zero-Coupon Bond’s Duration May Be Undetermined

Summary

The document asks how to determine the duration of a ten-year zero-coupon bond that can be called annually at par beginning in year six, given a flat yield of ten percent. Although an ordinary zero-coupon bond’s duration equals its maturity, the call feature may cause the bond to be redeemed earlier, changing its cash flows and interest-rate sensitivity.

The discussion frames the multiple-choice answer as potentially indeterminate from the stated information. It contains no answer or supporting valuation analysis, so it does not establish a duration or explain precisely what additional assumptions are needed. The practical lesson is that maturity alone does not settle duration when an issuer’s call right can alter the timing of payments; the call exercise assumptions and valuation framework matter.

Key ideas

• A zero-coupon bond without embedded options has duration equal to its maturity.
• A callable bond’s cash-flow timing can change when the issuer exercises its call right.
• The question does not provide an answer or establish enough analysis to calculate duration.

Tags

# Duration of callable zero coupon bond


# Duration of callable zero coupon bond












Can anybody please help me out with the below question with a brief explanation:-

A 10-year zero coupon bond is callable annually at par (its face value) starting at the beginning of year 6. Assume a flat yield curve of 10%. What is the bond duration? A- 10 Years B- 5 Years C- 7.5 Years D- Cannot be determined based on the data given.

According to me it should be 10 years as the duration of a zero coupon bond is always equal to its maturity. But I am not getting convinced with my answer because of the callable feature in the question. Can somebody please explain me in context of the callable feature on the zero coupon bond?

Thanks in advance!!

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