Duration of Corporate Bonds, Asset Backed Securities and Goverment Bonds

CFA Level III
#1

Hello all

Can someone pls explain to me the following:

First, corporate debt securities have higher yields and thus shorter durations than government securities of similar maturity. Asset-backed securities tend to have lowe effective durations than corporate and government bonds.

  1. Like why would corporate debt securities have lower duration than government bonds?
  2. WHy would asset-backed securities have lower effective duration than corporate and government bonds?
#2

Corporate bonds are more sensitive to credit risk than to interest rates relative to government securities (in part to higher coupon like you mention it).
Asset back securities have floating rate coupons and as a consequence near zero duration.

Hope it helps.

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#3

  1. In general, as YTM increases, duration decreases. Similarly, as coupon rate increases, duration decreases.

  2. Asset-backed securities include a prepayment option (which works similarly to a call option); this option decreases the effective duration. If, as Flo mentions, they also have floating-rate coupons, that, too, reduces the effective duration.

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