coupon rate vs. duration

the lower the coupon rate, the higher the interest rate risk. a zero-coupon bond has the higher interest rate risk, therefore the highest duration.
 
duration can also be thought of as how long it takes you to get back your money...higher coupon = more money coming back to you faster= lower duration/less int rate risk...longer maturity= higher duration since longer time to get back money. highery ytm= lower duration/ int rate risk since you get your money back quicker with high ytm...
 
First ask yourself, what is duration....

.. it's the percent change in price to a percent change in yield...

With a low coupon bond, you are going to get a larger percent of your total return through capital appreciation... or more correctly, the change in the price of the bond from the time of purchase to maturity. Therefore, a movement in the interest rate is going to have a pretty big impact on your total yield.

But it you are getting a lot paid out in coupon, that portion of total return mutes the effects of the change in yield somewhat. Therefore, higher coupon, lower duration.

... and consequently, that is why a zero coupon bond has such a high duration (equal to its maturity)
 
higher coupon...........................lower duration
longer maturity..........................higher duration
higher market yield....................higher duration
 
th123 Wrote:
-------------------------------------------------------
> higher coupon...........................lower
> duration
> longer maturity..........................higher
> duration
> higher market yield....................higher
> duration


higher market yield is inversely related to duration. (duration is also how long it takes to get your money back. if you have a higher ytm, you wait less time to get your money back so you have less interest rate risk and LOWER duration)
 
You must log in or register to reply here.
Back
Top