Asked by Jonah Marukot on May 12, 2024
Verified
Which of the following statements are true?I) Holding other things constant, the duration of a bond decreases with time to maturity.II) Given time to maturity, the duration of a zero-coupon increases with yield to maturity.III) Given time to maturity and yield to maturity, the duration of a bond is higher when the coupon rate is lower.IV) Duration is a better measure of price sensitivity to interest-rate changes than is time to maturity.
A) I only
B) I and II
C) III only
D) III and IV
E) I, II, and IV
Coupon Rate
The annual interest rate paid by a bond relative to its face value, representing the yield an investor expects to earn if the bond is held to maturity.
Yield
It refers to the earnings generated and realized on an investment over a particular period, expressed as a percentage.
Duration
A measure of the average life of a bond, defined as the weighted average of the times until each payment is made, with weights proportional to the present value of the payment.
- Understand the basic concepts of bond duration and its role in measuring interest-rate risk.
- Calculate and interpret Macaulay and modified durations for various bonds.
Verified Answer
2L
2020 Lizbeth TafollaMay 18, 2024
Final Answer :
D
Explanation :
III) Given time to maturity and yield to maturity, the duration of a bond is indeed higher when the coupon rate is lower. This is because lower coupon rates mean that a larger proportion of the bond's cash flows are received later, increasing its sensitivity to interest rate changes. IV) Duration is indeed a better measure of a bond's price sensitivity to interest rate changes than time to maturity because it accounts for the time value of money and cash flow distribution, unlike time to maturity which only considers the final payment date.
Learning Objectives
- Understand the basic concepts of bond duration and its role in measuring interest-rate risk.
- Calculate and interpret Macaulay and modified durations for various bonds.