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What can I assume?

October 30th, 2007

Here is another great question I received.

I know that when we see simply “duration” on a question it is safe to assume that the question is asking for MacD (unless the interest rate is nominal, in which case we find ModD…) but are there any other things that we can assume? For example, if we simply see “annuity” in a problem, could we assume it was an annuity-immediate? Or would that not necessarily be the case? Are there any other wording things that are always specified or always implied to be one thing or the other?

If a problem says duration it means Macaulay duration, end of story. It doesn’t matter if they give you a nominal rate it still means Macaulay duration. If they want you to calculate modified duration, then they have to explicitly say Modified duration in the problem.

An annuity must tell you both the amount and the time the payments occur. You can assume neither. If the problem just says “An annuity pays 50 per year, calculate the present value.” Then you do not have enough information, b/c the time the payments are made is not given.

James Student Questions

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