Duration & Price Volatility — Q&A

Long maturities and low coupons. The debt security with the longest maturity and lowest coupon has the highest duration.

The 20-year bond falls more. The 1-year bond matures soon, returning par for reinvestment at higher rates. The 20-year bond is locked into a lower coupon for much longer.

The 2% bond falls further. The 10% bond pays more interest along the way, giving the holder more cash to reinvest at higher prevailing rates, reducing sensitivity.

(1) Measuring how sensitive a bond’s price is to interest rate changes, and (2) estimating how long (in time terms) it takes to recoup the bond’s original cost through cash flows.

12 years. Annual interest = $100; $1,200 ÷ $100 = 12 years to recoup the purchase price. (The text notes this is an oversimplified calculation.)

20 years — equal to maturity. Zero coupon bonds pay no interim cash flows, so the full investment is recouped only at maturity.

The zero coupon bond (0% coupon). Same maturity does not mean same duration — coupon is the differentiator. Zero coupon duration always equals maturity.

120 = 120% of par = $1,200. 45 = 45% of par = $450.

Long-maturity bonds rise more because their higher coupon payments are locked in for many years, making them more valuable relative to new lower-rate issues.

Short maturities and high coupons — the opposite end of the spectrum from long maturity/low coupon bonds.