Question

What is duration and How maturity, yield to maturity, and coupon rate affect the duration of a security?

Answer 1

Duration measures how sensitive is the price of a bond to interest-rate changes.

For example, if we say the duration of the bond is 5 years, it means that the bond’s price will decline by 5% if the interest rate on the bond goes up by 1%.

1. Duration is inversely related to the bond’s coupon rate.

2. Duration is inversely related to the bond’s yield to maturity (YTM).

3. Duration can increase or decrease given an increase in the time to maturity (but it usually increases).