All else constant, which of the following will decrease the Macaulay duration of a straight bond?
I. reducing the coupon payment
II. shortening the time to maturity
III. lowering the yield to maturity

Question

Quizplus · Accepted Answer

Macaulay duration is inversely related to the time to maturity. Shortening the time to maturity will reduce the Macaulay duration. Therefore, statement II is correct. Reducing the coupon payment will increase the effective duration since it will increase the bond’s price sensitivity to interest rate changes. Thus statement I is incorrect. Lowering the yield to maturity will increase the bond price and this will increase the effective duration. Hence statement III is incorrect.

All Else Constant, Which of the Following Will Decrease the Macaulay