8700 18650 duration 18600 18550 18500 3 5 7 9 11 13

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Unformatted text preview: Duration Duration 1.86 00 1.8600 1.8550 1.8500 3 5 7 9 11 13 Yie ld to M aturity 1 The results and diagrams show that duration is i) inversely related to coupon rate. The higher the coupon rate, the sooner the investor will recover the cost of investment and hence the smaller duration. ii) directly related to maturity. The longer the maturity, the longer it takes to recover the cost of investment and hence the larger duration. iii) inversely related to yield to maturity. If you plot a diagram to illustrate the relationship between the yield and price of a bond, you should realise that the bond price decreases at a decreasing rate with yield. This relationship implies that the larger the yield, the lower the price sensitivity of a bond to interest rate changes. But smaller duration also corresponds to lower bond price sensitivity. Thus the larger the yield, the smaller the duration. C. From the session on bond pricing: As Coupon rate ↓ and maturity ↑, price sensitivity ↑. From the previous question: As Coupon rate ↓ and maturity ...
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This note was uploaded on 10/29/2010 for the course FINS 2624 taught by Professor Hneryyip during the Three '10 term at University of New South Wales.

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