Why these duration questions cause avoidable mistakes
Duration questions often look easy because the candidate remembers a slogan like "longer maturity means higher duration." The problem is that exam vignettes usually test a narrower question:
- are you comparing two bonds or one portfolio
- are coupon rates the same or different
- is the question about the fixed-income sleeve or the entire multi-asset portfolio
- is the answer supposed to be directional or exact
If you skip those scope checks, you can pick an answer that sounds generally true but is wrong for the setup in front of you.
flowchart TD
A["Start with the prompt"] --> B{"Is the question about one bond or a portfolio?"}
B -->|One bond| C{"Are coupon and yield conditions comparable?"}
B -->|Portfolio| D["Use market-value-weighted average duration"]
C -->|Yes| E["Longer maturity usually means higher duration"]
C -->|No| F["Re-check cash-flow timing and discount-rate weights"]
D --> G{"Added bond has lower duration than current sleeve?"}
G -->|Yes| H["Portfolio duration usually falls"]
G -->|No| I["Portfolio duration usually rises or stays similar"]
Duration is not the same thing as maturity
Maturity is the date of the final payment. Duration is a weighted-average timing measure that reflects when the bond's economic value is received.
That difference matters because two bonds can share the same maturity and still have different durations:
- a high-coupon bond returns more value earlier, so duration falls
- a low-coupon or zero-coupon bond pushes more value into the final payment, so duration rises
- a change in discount rate can alter the present-value weight on each cash flow