Hi,
Anyone can explain to me why does lower coupon rate lead to higher duration ? Thank you.
Well, I think the easy way to understand this is to remember that the PV of further dated cash flows are more sensitive to changes in interest rates (i.e., higher duration) than are nearer dated cash flows.
So lower coupon rates means a bond’s PV of cash flows are more heavily weighted towards the principal repayment, which is the largest and furthest dated cash flow. Hence, all else held constant a bond with lower coupon rates will be more sensitive to interest rate changes (have higher duration) than an otherwise identical but higher coupon rate one.
This naturally leads to the discussion of Macaulay duration, which looks at a bond’s weighted average time to repayment. So maybe that is worth a second read.
Hope that helps!
If you want to understand the effect of maturity, coupon rate, amortization, and so on, always look to Macaulay duration; it’s the easiest to visualize.
Then realize that modified duration acts exactly the same.