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Two bonds are selling at par value, and each has 17 years to maturity
Two bonds are selling at par value, and each has 17 years to maturity. The first bond has a
coupon rate of 6%, and the sec
ond bond has a coupon rate of
13%. Which of
the following
is true about the durations of these bonds?
A) The duration of the higher coupon bond will be higher.
B) The duration of the lower coupon bond will be higher.
C) The duration of the higher coupon bond will equal the duration of the lower coupon
bond.
D) There is no consistent statement that
can be made about the
durations of the bonds.
Expert Solution
Duration means how much time it takes to receive its true value of bond and it is the price of a bond by bonds cash flow which investors receives every year. Normally, Higher rate coupon rate have less duration than lower coupon rate bonds with the same maturity.
So, bond which has a coupon rate of 6% will have have a higher duration than the bond with a coupon rate of 13%.
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