Question

Tom corporations bonds pay 10% coupon and have a maturity of 5 years, while Smith's bonds pay 4 % and have a maturity of 9 years.

how do coupon and maturity impact the duration of tom and smiths bonds?

Answer 1

Duration stated in times of years, but it is not identical to the bond's maturity date. The maturity date of the Bond is one of the important factors in deciding duration.

For a zero-coupon bond,

duration = the bond's remaining time to its maturity date

When a coupon added to the Bond, the bond's duration number will always be less than the maturity date.

The higher the coupon, the lower the duration number.

Usually, bonds with distant maturities and lower coupons have longer durations.

Smith's bonds pay 4 % and have a maturity of 9 years they will have longer durations.

These bonds are more susceptible to a shift in market interest rates and are more unpredictable in uncertain rate conditions.

Bonds with smaller maturity dates or higher coupons will have lower durations.

Tom corporations bonds pay 10% coupon and have a maturity of 5 years will have lower durations.

Bonds with lower durations are less susceptible to shifting rates and are less unpredictable in uncertain rate conditions.

If interest rates happened to fall, the price of a bond with a higher duration would grow more than a Bond with a lower period.

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