CFA Practice Question

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CFA Practice Question

The duration of a bond ______ whenever the bond pays a coupon.

A. increases
B. decreases
C. remains the same
Correct Answer: A

Since the duration is the average time to whatever payments are promised by the bond, it's reasonable that duration increases when the very near-term payment disappears from the future payment stream right after the coupon payment.

User Contributed Comments 6

User Comment
CJPerugini Wouldn't it decrease duration?

Duration is a measure of interest rate risk/sensitivity to a change in its yield. A decrease in a bond's periods to maturity decreases interest rate risk. By making a coupon payment, the number of periods to maturity has decreased thus decreasing duration.
lvjunzhang Maturity: The longer a bond's maturity, the greater its duration (and volatility). Duration changes every time a bond makes a coupon payment. Over time, it shortens as the bond nears maturity.
ashish100 Explanation and the guy above didn't help me understand this at all. Can someone else explain it for CJ and I so that the rest of the world can understand this?
Kiniry Just read the notes. Duration of the bond has a sawtooth pattern over time. Exhibit 6 in the CFA text if you want to read there.
dbedford Part of a bond duration calc is t/T and when a coupon is paid t = 0 at that time and then the duration spikes until the next day when t = full time before next coupon.

When t = 0, t/T is temporarily removed from duration calc causing duration to spike for that day
zriddle Saw tooth graph, it declines before the coupon then spikes after payment.
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