All else being equal, which of the following is true about duration:A bond's duration is higher when the yield is higher.A bond's duration is lower when the yield is higher.Duration is not affected by the size of coupons. Duration is not affected by maturity.
Question
All else being equal, which of the following is true about duration:A bond's duration is higher when the yield is higher.A bond's duration is lower when the yield is higher.Duration is not affected by the size of coupons. Duration is not affected by maturity.
Solution
Duration is a measure of the sensitivity of the price of a bond to a change in interest rates. It is influenced by several factors including the bond's yield, coupon rate, and time to maturity.
A. A bond's duration is higher when the yield is higher - This is false. When the yield is higher, the bond's duration is lower. This is because higher yields reduce the present value of future cash flows, which in turn reduces duration.
B. A bond's duration is lower when the yield is higher - This is true, as explained above.
C. Duration is not affected by the size of coupons - This is false. The size of the coupons does affect the duration. Bonds with larger coupons have a lower duration because the present value of the bond is received more quickly.
D. Duration is not affected by maturity - This is false. Duration increases with the time to maturity. The longer the time to maturity, the higher the duration because it takes longer to receive the present value of the bond.
Therefore, the answer is B. A bond's duration is lower when the yield is higher.
Similar Questions
Which of the following statements is FALSE?A.For a given maturity fixed-income asset, duration decreases as the market yield increases. B.Duration of a zero coupon bond is equal to the bond's maturity. C.Duration considers the timing of all the cash flows of an asset by summing the product of the cash flows and the time of occurrence. D.The economic meaning of duration is the interest elasticity of a financial asset’s price. E.Duration increases with the maturity of a fixed-income asset at a decreasing rate.
Which of the following statements is false? A. Bonds with shorter maturities, all else being equal, have higher durations. B. A zero coupon bond with a longer maturity is more sensitive to changes in the interest rate than a shorter maturity zero coupon bond. C. Bonds with higher coupon rates, all else being equal, have lower durations. D. The higher the convexity of a bond (in absolute terms) the more inaccurate its duration is as a measure of interest rate sensitivity.
Calculating the duration of a 9% coupon, 8% yield to maturity, 4-year annual payment bond, if the coupon rate decrease and other factors remain the same, the duration for new bond will ? A. 4.1004 years; increase B. 3.5396 years; increase C. 2.2989 years; decrease D. 4.0000 years, increase
Consider a two-year bond with a yield to maturity of 7% and an annual coupon rate of 5%. The bond is currently traded at $96.38, and the duration of the bond is 1.95 years. If the bond's yield to maturity changes to 11%, estimate its price change by using its duration.
A bond that is held to maturity A. will necessarily have a yield to maturity equal to the coupon rate. B. will necessarily earn the yield to maturity at the time of purchase. C. may earn more or less that its yield to maturity at the time of purchase because the rate at which coupons can be reinvested may change. D. will earn the yield to maturity at the date of maturity.
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