Question

T/F: The duration of a zero coupon bond will always be less than the duration of a coupon-bearing bond with the same maturity and yield.

Answer 1

Answer: False

Duration or interest rate sensitivity of the bond is dependent on term to maturity and coupon rate. Higher the term to maturity or lower the coupon rate, higher would be bond's duration and hence its interest rate sensitivity. Shorter the term to maturity or higher the coupon rate, lower would be bond's duration and hence its interest rate sensitivity.

In the question, term to maturity for two bonds is same. The only difference is for coupon rate. So, zero coupon bond would have a lower corupon rate, which implies it would have a higher duration than coupon paying bond.