Your Uncle Jamie wishes to invest some money in either Bond A or Bond B. Bond A has a face value of $1,000, a coupon rate of 6%, a date to maturity of 3 years, and a current price of $1,000. Bond B has a face value of $1,000, a coupon rate of 8%, and a date to maturity of 3 years. Coupons are paid semi-annually.
a. Which bond has a higher duration?
b. Bond duration measures a bond’s sensitivity to interest rate changes: the higher the duration, the more sensitive a bond is to interest rate changes. If Uncle Jamie is risk averse, which bond should he choose?