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Mar20-12, 06:25 PM
P: 59
Thanks BWV.

The explanation for C makes a lot of sense now. Im not so clear about the explanation for A though. I can intuitively see that if I lock money away for a longer period I should expect a greater return, but how does the duration formula show this?

For the two bonds I have something like the following :

P_z = F/(1+R)^n
P_c = C(1/(1+r) + 1/(1+r)^2 + ... + 1/(1+r)^n) + F/(1+r)^n

Now P_z and P_c are not expected to be equal, and I can choose C to be anything I like, so I have complete flexibility to change P_c and C to give me an r > R or r < R.