why coupon up, duration down?
the lower the coupon rate, the higher the interest rate risk. a zero-coupon bond has the higher interest rate risk, therefore the highest duration.
duration can also be thought of as how long it takes you to get back your money…higher coupon = more money coming back to you faster= lower duration/less int rate risk…longer maturity= higher duration since longer time to get back money. highery ytm= lower duration/ int rate risk since you get your money back quicker with high ytm…
First ask yourself, what is duration… … it’s the percent change in price to a percent change in yield… With a low coupon bond, you are going to get a larger percent of your total return through capital appreciation… or more correctly, the change in the price of the bond from the time of purchase to maturity. Therefore, a movement in the interest rate is going to have a pretty big impact on your total yield. But it you are getting a lot paid out in coupon, that portion of total return mutes the effects of the change in yield somewhat. Therefore, higher coupon, lower duration. … and consequently, that is why a zero coupon bond has such a high duration (equal to its maturity)
higher coupon…lower duration longer maturity…higher duration higher market yield…higher duration
th123 Wrote: ------------------------------------------------------- > higher coupon…lower > duration > longer maturity…higher > duration > higher market yield…higher > duration higher market yield is inversely related to duration. (duration is also how long it takes to get your money back. if you have a higher ytm, you wait less time to get your money back so you have less interest rate risk and LOWER duration)