Unformatted text preview: In general, the lower the coupon payment, the higher the Duration. Why? Because, there is more dependence on the repayment of the face value at maturity than the periodic interest paid to get the required rate of return. As yields increase, Duration decreases (moves to the left). Why? The higher the yield, the more that is earned on reinvested interest and it takes less time to recoup the investment. Conversely, Duration increases when bond yields decrease, since lower yields put greater weights on later payments. Since the 14% bond has a lower Duration, you should buy it if interest rates are expected to increase....
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This note was uploaded on 01/26/2012 for the course FIN 4620 taught by Professor Patriciarobertson during the Spring '12 term at Kennesaw.
- Spring '12