Schweser says all else equal, that if matuirty is up, duration is up and if coupon up, duration is down. In this sample problem, I thought the answer was D because the bond 2 and 4 maturities were the same but the bond 4 coupon was lower. This question indicates that yield might have stronger affect on duration than coupon. Does anyone have insight?: Q.Which one of the following option-free bonds has the lowest interest rate risk? Bond issue, Coupon rate, Maturity (Years) , Required Market Yield 1, 5.60%, 15, 6.40% 2, 6.20%, 14, 7.40% 3, 5.40%, 15, 6.60% 4, 5.80%, 14, 7.00% A) Bond issue 1. B) Bond issue 2. C) Bond issue 3. D) Bond issue 4. The correct answer was B) Bond issue 2. Explanation The price sensitivity is lower when the level of interest rates is higher. Bond issue 2 has the highest market yield and therefore is least susceptible to larger price swings as interest rates change. Put another way, Bond issue 2 has the lowest duration and is therefore the least sensitive to changes in interest rates.
The question asks for the LOWEST IR risk – that’s equivalent to the shortest duration. Bonds 2 and 4 both have shorter maturities, higher coupons, and higher mkt req’d returns (i.e. YTMs) than either Bond 1 or bond 3. Of the two (bonds 2 and 4), Bond 2 has both a higher coupon AND a higher req’d return.
Got it. I had it backwards. Thank you