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CFA Level I · CFA Level I Exam · Yield-Based Bond Duration Measures and Properties

Two bonds have the same maturity and the same yield-to-maturity. Bond X pays a 3% coupon and Bond Y pays a 7% coupon. Compared with Bond Y, Bond X most likely has:

Bond X, the lower-coupon bond, most likely has a higher modified duration. With equal maturity and yield, smaller coupons mean more of the bond's value is received at maturity, increasing the weighted average time of cash flows and the price sensitivity to yield changes.

  1. Aa lower modified duration
  2. Ba higher modified durationCorrect
  3. Cthe same modified duration because maturity is equal

Explanation

With maturity and yield equal, a lower coupon means a larger share of present value comes from the principal repaid at maturity, which lengthens the weighted average time to receipt. Macaulay and modified duration therefore are higher for Bond X. Maturity alone does not fix duration.

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