Assume that the required yield to maturity on a consol bond increases from 6% to 12%.What is the impact on the consol bond's duration?
A)As there are no intervening cash flows between issue and maturity, the duration will always equal the bond's maturity.
B)As interest rates rise, the duration of consol bonds falls.
C)As interest rates rise, the duration of consol bonds rises.
D)There will be no impact on the bond's duration.

Question

Quizplus · Accepted Answer

Consol bonds, or perpetuities, pay an infinite stream of cash flows. The duration of a consol bond is inversely related to its yield to maturity. Therefore, if the yield to maturity increases, the present value of distant cash flows decreases in importance, leading to a decrease in the bond's duration.

Assume That the Required Yield to Maturity on a Consol