Duration of a coupon paying bond is: equal to its maturity. less than a zero coupon...

Duration of a coupon paying bond is:

equal to its maturity.

less than a zero coupon bond.

equal to its number of payments.

None of these.

equal to the zero coupon bond.

Solutions

Expert Solution

ANSWER

CORRECT ANSWER : Option (b) : less than a Zero Coupon Bond

EXPLANATION :

Duration of a Bond is basically a "time period" within which our Initial Bond Investment gets recovered.
Zero Coupon Bonds are such bonds that does not pay any Interest throughout its tenure and only pays back the Par Value at the end of the tenure of such bond.
Now In case of Zero Coupon Bonds, the Bond Duration is always its time to maturity because we dont get any payment before the maturity. So we will recover our Investment at the end only. Therefore Duration is always "time to maturity.
On the other hand in case of Coupon Paying Bonds, since we get regular Coupon payments, we get to recover our Initial Investment always before its Maturity due to such regular coupon payments.
HENCE,

DURATION OF COUPON PAYING BOND IS LESS THAN ITS TIME TO MATURITY

DURATION OF ZERO COUPON BONDS IS EQUAL TO ITS TIME TO MATURITY

THEREFORE WE CAN CONCLUDE THAT :

DURATION OF COUPON PAYING BOND IS LESS THAN THAT OF ZERO COUPON BOND

jeff jeffy answered 1 year ago

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