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 second 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.
E) The bond's durations cannot be determined without knowing the prices of the bonds.

Question

Quizplus · Accepted Answer

Duration measures the sensitivity of a bond's price to changes in interest rates, typically indicating how long it takes for a bond to pay back its true cost. A bond with a higher coupon rate will pay back its cost more quickly due to the higher interest payments. Therefore, the bond with the lower coupon rate (6% in this case) will have a higher duration because it pays back its cost more slowly compared to the bond with the higher coupon rate (13%).

Two Bonds Are Selling at Par Value, and Each Has