The duration of a four-year maturity 10 percent coupon bond is less than four years.

Question

Quizplus · Accepted Answer

This statement is true because the duration of a bond is always less than its maturity. The duration takes into account the timing of coupon payments and the principal repayment, whereas the maturity only reflects the time until the bond reaches its face value. Since the coupon payments provide some of the investor's return before the final payment, the duration is reduced. Therefore, a four-year maturity 10 percent coupon bond will have a duration of less than four years.

The Duration of a Four-Year Maturity 10 Percent Coupon Bond