Which of the following bonds has the longest duration?

Question

Quizplus · Accepted Answer

Duration is a measure of a bond's sensitivity to changes in interest rates. The longer the duration, the greater the sensitivity. The duration of a bond is affected by its time to maturity, coupon rate, and yield to maturity.

Option A, a 12-year maturity, 0% coupon bond, will have the longest duration. This is because it has no coupon payments to offset the price decline when interest rates rise. As the time to maturity is longer, the sensitivity to interest rate changes is also higher.

Option B, a 12-year maturity, 8% coupon bond, will have a lower duration than a 12-year 0% coupon bond because the coupon payments help offset the price decline when interest rates rise.

Option C, a 4-year maturity, 8% coupon bond, will have a lower duration than a 12-year bond because of its shorter time to maturity.

Option D, a 4-year maturity, 0% coupon bond, will have a lower duration than a 12-year bond because both the time to maturity and the lack of coupon payments lower sensitivity to interest rate changes.

Which of the Following Bonds Has the Longest Duration