What is true about maturity and duration?

• A. The longer the bond's maturity, the longer the duration.
• B. The longer the maturity, the shorter the duration.
• C. Duration is unrelated to maturity.
• D. Duration always equals maturity.

Answer: (A)

Duration is the weighted average time to receive a bond’s cash flows, and it also reflects how sensitive the price is to interest-rate changes. For a standard fixed-rate bond, extending the time to maturity generally pushes more cash flows further into the future, raising the weighted average time and thus increasing duration. In simple terms, the longer you have to wait for payments, the longer the duration tends to be. An exception is zero-coupon bonds, where the only payment is at maturity, so duration equals maturity. For most coupon bonds, however, duration is less than maturity because the earlier coupon payments pull the weighted average forward. So, the statement that the longer the bond’s maturity, the longer the duration is the best description of their relationship.