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Bonds 102: Bond Duration

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1.
Shorter bond maturities mean longer bond durations.
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False. Longer, not shorter, bond maturities mean longer durations. Imagine a fixed amount of money--for example, $1,000--being mailed to you in small payments over time. If these payments were spread over a one-year period, you would recover your money faster than if the same dollar amount were spread over a five-year period.
2.
Roughly speaking, the price of a bond will change according to its duration.
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True. The price of a bond will change due to interest rates, roughly according to its duration. In other words, if rates move up by one percentage point--for example, from 6 percent to 7 percent--the price of a bond with a duration of 10 (years) will move down by about 10 percent.
3.
A bond's duration is the number of years required to recover the true cost of the bond.
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True. A bond's duration is the number of years required to recover its true cost, considering the present value of all coupon and principal payments received in the future.
4.
Which of the following best describes the correlation between bond duration and coupon rates?
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The higher the coupon rate, the shorter the duration. In other words, the more money coming in now (because of a higher rate), the faster the bondholder will recover its cost.
5.
A bond is issued with a stated value, known as its par value.
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True. A bond's stated value is its par, or face value. This is the value at which the bond will be bought back by the issuer upon its maturity.