How is duration affected by the coupon rate of a bond with identical maturities?

Duration is a measure of a bond's sensitivity to changes in interest rates and reflects the weighted average time until the bond's cash flows are received. It is influenced significantly by the bond’s coupon rate.

In general, for two bonds with identical maturities, the bond with the lower coupon rate will have a longer duration. This is because a bond that pays a lower coupon has a larger portion of its cash flow occurring at maturity, while a higher coupon bond returns a greater portion of its cash flows earlier in the form of coupon payments.

As the bond with the higher coupon rate pays out more cash flow in the form of regular interest payments, this reduces the duration because there is less time before receiving those cash flows compared to a bond with a lower coupon rate, which extends the time until final cash flow is received. Hence, the temporal weighting of the cash flows shifts, leading to an increased duration for the bond with the lower coupon rate.

This fundamental relationship between coupon rates and duration is crucial for investors as it influences risk assessments and decisions about bond investments in the context of interest rate changes.