I would like to know if this difference occurs when the coupon payments are very large and/or if there are other reasons.
1 Answer
There are several reasons why the average effective duration might be significantly less that the average maturity:
- Use of floating-rate bonds (they have very small effective durations)
- Use of derivatives (i.e. bond futures or swaps)
- Use of bonds with embedded options (callable/putable)
Any of those can be used to manage duration.