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.
Answer:A
The duration of a zero-coupon bond is always equal to its maturity, regardless of whether it is callable. If the issuer calls a zero, it will be for the purpose of retiring debt, not refunding at lower rates.