Assume that the required yield to maturity on a consol bond increases from 6 per cent to 12 per cent. What is the impact on the consol bond's duration?
A) As there are no intervening cash flows between issue and maturity, the duration will always equal the bond's maturity.
B) As interest rates rise, the duration of consol bonds falls.
C) As interest rates rise, the duration of consol bonds rises.
D) There will be no impact on the bond's duration.

Question

Quizplus · Accepted Answer

The duration of a consol bond, which pays perpetual interest, is inversely related to interest rates. As interest rates rise, the present value of future cash flows decreases, leading to a shorter duration.

Assume That the Required Yield to Maturity on a Consol