Higher duration implies greater price risk when interest rates move. Which statement is true?

Higher duration implies greater price risk when interest rates move. Which statement is true?

• A. Higher duration means lower price risk.
• B. It has no relation to price risk.
• C. Higher duration implies greater price risk.
• D. Duration only affects equity.

Answer: (C)

Duration tells you how much a bond’s price will move when interest rates change. It measures price sensitivity to yield changes. A bond with a higher duration will experience a larger price change for the same shift in rates. So, when rates rise, the price decline is larger for high-duration bonds, and when rates fall, the price rise is larger too. This is why higher duration implies greater price risk. A handy rule of thumb is that price change is approximately the negative of duration times the change in yield (with yield in decimal form). For example, a 1 percentage point rise (0.01) would move a bond with modified duration of 6 by about −6% in price, whereas a bond with duration 3 would move about −3%. Longer time to maturity and lower coupons tend to push duration higher, increasing price risk with rate moves. The other statements don’t fit because duration is a fixed-income concept tied to how sensitive a bond is to interest-rate changes, not to equities; saying it has no relation to price risk or applies only to equity would be incorrect.

Duration tells you how much a bond’s price will move when interest rates change. It measures price sensitivity to yield changes. A bond with a higher duration will experience a larger price change for the same shift in rates. So, when rates rise, the price decline is larger for high-duration bonds, and when rates fall, the price rise is larger too. This is why higher duration implies greater price risk.

A handy rule of thumb is that price change is approximately the negative of duration times the change in yield (with yield in decimal form). For example, a 1 percentage point rise (0.01) would move a bond with modified duration of 6 by about −6% in price, whereas a bond with duration 3 would move about −3%. Longer time to maturity and lower coupons tend to push duration higher, increasing price risk with rate moves.

The other statements don’t fit because duration is a fixed-income concept tied to how sensitive a bond is to interest-rate changes, not to equities; saying it has no relation to price risk or applies only to equity would be incorrect.