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