Question

At the same interest rate, which of the following five-year securities will have the lowest duration

		A Treasury note.
		A Treasury bond.
		A car loan.
		A simple load.
		A zero-coupon bond.

Answer 1

Duration of the bond measures its price sensitivity if the interest rates are changed. At the same interest rate and maturity period -

A Treasury note: The duration of treasury note will depends on its periodic coupon payments & maturity amount payment at the end of 5-year but major cash flow will come at the end of 5-year therefore duration will be near but less than 5 years.

A Treasury bond: The duration of treasury bond will depends on its periodic coupon payments & maturity amount payment at the end of 5-year but major cash flow will come at the end of 5-year therefore duration will be near but less than 5 years.

A car loan: Car loans generally pay equal monthly installments; therefore cash flows are spread evenly throughout 5 years period. Therefore duration will be lowest for this option

A simple loan: Simple loans generally pay annual installments or only interest amount and principal amount at the end of loan period; therefore major cash flows will come at the end of 5-year therefore duration will be near but less than 5 years.

A zero-coupon bond: The duration of zero coupon bonds are equals to its maturity period because zero-coupon bond has no cash flow until maturity. Therefore duration will be highest for this option.

Therefore correct answer is option: A Car Loan