Question

Bonds A and B are both seven-year bonds with annual coupon payments. Bond A has a higher coupon rate and higher yield. Given this information, is it possible to determine which of the two bonds has higher duration (D)? If yes, identify this bond and explain why it has higher duration. If not possible, explain why not.

Answer 1

Duration is a measure of Bond's price sensitivity with respect to change in market interest rate.

The relationship between Duration and Coupon rate, Yield to maturity & Time until maturity given as below:

• Duration and Coupon rate are inversely related.
• Duration and Yield to maturity are inversely related
• Generally, Duration and Time to maturity are directly related.

Thus,

When other factors remain same then a bond with higher coupon rate would have lower Duration value.

and also,

When other factors remain same then a bond with higher yield rate would have lower Duration value.

In given case,

Bond A and Bond B both have same maturity i.e 7 years but Bond A has a higher coupon rate and yield to maturity.

Thus, Bond A has lower duration and Bond B has higher Duration.