Final answer:
The duration of the portfolio is calculated as the average of the maturities of the two stripped U.S. Treasury securities, which is 17 years, rounded to the nearest year (option A).
Step-by-step explanation:
The student's question pertains to calculating the duration of a portfolio that consists of two stripped U.S. Treasury securities with different maturities and an assumption of a flat yield curve at 4%. Duration represents the weighted average time to receive the bond's cash flows and is a measure of interest rate risk; the longer the duration, the more sensitive the bond's price is to changes in interest rates.
To calculate duration, we usually need a detailed calculation that accounts for the present value of all the cash flows. However, because these are zero-coupon bonds, their duration is equal to their time to maturity. The duration of the first security is 5 years, and the second is 29 years. Since both bonds have a face value of $10,000, we simply take a weighted average, which in this case, because the face values and interest rates are the same, is just the average of the two maturities.
Therefore, the duration of the portfolio is (5 years + 29 years) / 2 = 17 years, rounded to the nearest year, which corresponds to option A).