Hi, just quickly want to check if my understanding of the subject is correct.
I’ve seen a solution saying when rate shifts up, duration of coupon paying bonds are lower than zero coupon.
Is this because the coupons are re-invested at higher return?
Any relationship with coupon paying bonds having higher convexity here?
Mac Dur of a 0 bond = maturity. This is higher than any coupon paying bond assuming all else stays same. This in turn would translate into a higher Mod Dur for 0 bonds. The best way to get this is to open up an excel sheet and determine the Mac D on a 0 bond and a coupon bond and use the Mac Dur to determine Mod Dur and you’ll get your answer.
Higher the coupon - lower the duration.
Coupon bonds are reset with every coupon hence it’s duration is calculated for the period till resetting and accordingly has a duration which is lower than zero coupon bond.
Think of it as we have two bonds both will mature in two years. Bond A is a zero coupon bond and Bond B is a semiannual coupon bond. The duration of bond A will be over a year and for bond B it will be every half a year.
Thank you all for commenting here, but anyone with solid understanding?
I am in doubt if you can score full mark with your answers.
I am just wondering if we have a strong supporting statement to support “higher coupon bonds -> lower duration”