Question

Macaulay duration is longest for __________.

A. high-coupon 30-year bonds

B. low-coupon 30-year bonds

D. none of the above

C. zero-coupon 30-year bonds

Answer 1

D. Zero coupon 30-year bond

A bond's price, maturity, coupon and yield to maturity all factor into the calculation of duration.

Aas maturity increases, with other variables constant, duration increases.

As a bond's coupon increases (with other variables constant), its duration decreases.

As interest rates increase (with other variables constant), duration decreases and the bond's sensitivity to further interest rate increases goes down.

For a zero coupon bond (which has no coupon), hence sensitivity to interest rate is higher, compared to a coupon paying bond.