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#1
Hi guys,
My question is why does duration go down for lower coupon bonds. I have read many many threads on this already on the internet and bionic turtle. The reason I still post this question is b/c I understand the question from the macaulay's duration point of view which is that you get your cashflows faster with higher coupons so less interest rate risk. ok thats fine. but I am stuck on modified duration which literally looks at the math of this. If I compute a simple example where I have a 5% 3 year coupon paying bond and shift yields from 1 to 2% the difference in price I get is much higher than if I do this with the 2% coupon bond example. Please can you actually guide me on only the modified duration explanation for why lower coupons produce more duration than higher coupon bonds b/c the math is not tying this out. Please see my excel file.
My question is why does duration go down for lower coupon bonds. I have read many many threads on this already on the internet and bionic turtle. The reason I still post this question is b/c I understand the question from the macaulay's duration point of view which is that you get your cashflows faster with higher coupons so less interest rate risk. ok thats fine. but I am stuck on modified duration which literally looks at the math of this. If I compute a simple example where I have a 5% 3 year coupon paying bond and shift yields from 1 to 2% the difference in price I get is much higher than if I do this with the 2% coupon bond example. Please can you actually guide me on only the modified duration explanation for why lower coupons produce more duration than higher coupon bonds b/c the math is not tying this out. Please see my excel file.
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