I cannot think of an instance when duration would be greater than time to maturity. However, in Elan’s practice questions (Reading 66 Question 15 for those who use Elan) it says that “It is possible for a security to have a duration that exceeds its term to maturity”. I checked the errata and it is not listed in there. Am I missing something here? Is this possible with certain types of bonds? I had always understood that a zero-coupon bond had the highest duration for a given maturity, which equals its time to maturity.
Inverse floaters can have a duration greater than their term. I’m not sure if this is mentioned in the curriculum though. http://pages.stern.nyu.edu/~eelton/debt_inst_class/Floaters%20&%20Inverse%20Floater.pdf http://www.wilmott.com/messageview.cfm?catid=3&threadid=78122
yes, and there are all sorts of exotic shennanigans that can have duration > maturity
figured it would have to deal with more exotic securities. I’m sure it won’t be on Level I but it’s just interesting to know in general. thanks for the links beatthecfa
It is written in curriculum that a bond’s duration can exceed its maturity and that it can also be negative. This thing is also tested in few end of chapter questions. Check it out!
This is definitely there in the curriculum under interpretations of duration
I’m not sure you have to think of exotic shenanigans. For instance, imagine a corporate zero for a company that benefits by falling interest rates. Absent issues of credit quality, optionality, etc the bond has duration = maturity. But falling interest rates make the credit quality of the bond better and rising interest rates hurt the credit quality, so interest rate changes affect the bond more than the structure of the bond paymenst would suggest. It’s pretty easy to come up with structured finance examples like this too.
beatthecfa Wrote: ------------------------------------------------------- > Inverse floaters can have a duration greater than > their term. I’m not sure if this is mentioned in > the curriculum though. > > http://pages.stern.nyu.edu/~eelton/debt_inst_class > /Floaters%20&%20Inverse%20Floater.pdf > > http://www.wilmott.com/messageview.cfm?catid=3&thr > eadid=78122 This says it all. And it’s definitely in the curriculum or if you’re using schweser the LOS. very possible!
This can be the case for a negative coupon rate bond, in which modified duration is larger than maturity.