Question

Explain how duration changes if the following bond characteristics change. In each case, assume nothing else about the bond changes except the factor mentions. a. Maturity of the bond b. Bond coupon c. Coupon payment frequency d. Adding a call feature to a bond e. Adding a put feature to a bond

Answer 1

a) As maturity increases, the duration increases as there is more compounding.
b)As coupon rate increases, the duration decreases as higher coupon cusion discounting

c) As frequency increases, there is more discounting therefore the duration increases.

d)Adding call feature will reduce the duartion as bond may be recalled earlier.

e) Adding put shall also reduce duration.