CFA Level I · CFA Level I Exam · Yield-Based Bond Duration Measures and Properties
Two annual-pay bonds have the same maturity and yield to maturity. Bond X has a coupon rate of 3% and Bond Y has a coupon rate of 8%. Which statement about their Macaulay durations is most likely correct?
Bond X, with the lower coupon, has the higher Macaulay duration. Lower coupons put more of the bond's present value in the final principal payment, so the weighted-average time to cash flows is longer, all else equal.
- ABond X has the higher durationCorrect
- BThe durations are equal
- CBond Y has the higher duration
Explanation
A lower coupon shifts more of the present value of cash flows to the final payment, lengthening the weighted-average time to receipt. Bond X therefore has the higher Macaulay duration. Equal durations would occur only for zero-coupon bonds.
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