Final answer:
The lower the coupon rate and the longer the maturity date of a bond, the greater the bond's duration, indicating higher sensitivity to interest rate changes.
Step-by-step explanation:
When all is held constant, the lower the coupon and the longer the maturity, the greater the duration of a bond. Duration is an important concept in bond investing, as it measures a bond's sensitivity to changes in interest rates. Bonds are debt securities issued by entities to raise capital. The coupon rate or interest rate is a critical component of a bond, usually paid semi-annually. The bond also has a maturity date, which is when the face value is repaid to the investor. The present value of a bond is calculated based on the bond's face value, interest rate, maturity date, and market interest rates, indicating the maximum value an investor is willing to pay.
For example, consider a bond with no risk that sells for $1,000 at issuance, paying the purchaser $80 per year until maturity. If market interest rates rise to 12% and there is only one year left to maturity, the bond becomes less attractive due to the availability of bonds with a 12% rate. To make the 8% bond appealing, the seller must reduce its price below the face value of $1,000.