Describe how bond duration is related to coupons-02149
This subjective question is related to the book/course
vu mgt611 Business & Labor Law.
It can also be found in
vu mgt611 Mid Term Solved Past Paper No. 1.
Duration expands with time to maturity but at a decreasing rate (holding the size of coupon payments and the yield to maturity constant particularly beyond 15 years time to maturity). Even between 5 and 10 years time to maturity, duration is expanding at a significantly lower rate than in the case of a time to maturity of up to 5 years, where it expands rapidly. Note that for all coupon-paying bonds, duration is always less than maturity. For a zero-coupon bond, duration is equal -to time to maturity.
Yield to maturity is inversely related to duration (holding coupon payments and maturity constant).
Coupon is inversely related to duration (holding maturity and yield to maturity constant). This is logical, because higher coupons lead to quicker recovery of the bond's value, resulting in a shorter duration, relative to lower coupons.
--or--Duration
The term duration has a special meaning in the context of bonds. It is a measurement of how long, in years, it takes for the price of a bond to be repaid by its internal cash flows. It is an important measure for investors to consider, as bonds with higher durations carry more risk and have higher price volatility than bonds with lower durations. Zero-coupon Bond duration = its time to maturity
