Could you please explain how C is correct. If I take mortgage loan, I get low rate for 15 years than 30 years. All else equal, the lower the bond’s yield to maturity, the: A) shorter the duration and the higher the interest rate risk. B) shorter the duration and the lower the interest rate risk. C) longer the duration and the higher the interest rate risk. D) longer the duration and the lower the interest rate risk. Your answer: B was incorrect. The correct answer was C) longer the duration and the higher the interest rate risk. A lower yield to maturity would result in a longer duration and higher interest rate risk.
Duration is positively related to time-to-maturity while it is negatively related to YTM and coupon rates. C looks good to me… - Dinesh S
Thanks for reply. I will remember your reply.
See it this way… 1)))The lower YTM… the less youll be receiving/making out of the bond.. As youre receiving back so very little it will take long time before you can collect all your initial investment… RIGHT THERE… we know duration long TIME 2))) The longer we are going to stick around owning this and waitting to collect what we first paid the longer and more exposed we are to risk… you hope you know what will happen in a year or two… but in 20-30 years nothing is for sure
^^Thanks rene! I think that explanation will stick with me…
check this out http://www.investopedia.com/university/advancedbond/advancedbond5.asp Theres a lil diagram in the middle of the page. Its pretty useful to remember these relationships.
Excellent link. Thanks a lot