Question

6. Which of the following statement(s) is/are true?
a. A bond’s duration must be less than its maturity.
b. For an option-less bond, as it moves closer to maturity, its duration changes and decreases.
c. For an option-less bond selling at a discount, as it moves closer to maturity, its price changes and decreases.
d. A & B only
e. All of the above

a

b

c

d

e

Answer 1

Option B is correct

Statement A is not true. A bond's suration can equal to its maturity. This is the case with zero coupon bonds, where a duration of bond = time to maturity.

Statement B is correct. As a bond moves closer to maturity, its life (or time to maturity) decreases. Duration of a bond is directly proportional to the time to maturity. Lower time to maturity means lower duartion and hence the duration of the bond declines, as it moves towards maturity.

Statement C is incorrect. All bonds move towards their par value till they reach maturity. So, for a discount bond, the bond price will increase to reach par value, as it moves towards maturity. And for a premium bond, the bond price will decrease to reach par value, as it moves towards maturity