I would like to know if this difference occurs when the coupon payments are very large and/or if there are other reasons.
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1$\begingroup$ What is an example of such a Mutual Fund? $\endgroup$ – Alex C Sep 25 '19 at 3:32
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In some cases, a portion of the principal can be returned before maturity. Mortgage bonds are one example.
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Hard to be too specific when there’s a lot of caveats in both “effective” measures, and their definitions, above :-)
This said, there are two complimentary reasons for maturity>>duration. The first of which is that duration, as a measure of the derivative of price with respect to yield given time, will (almost) always be lower than time. That is just is just a mathematical and a logical given. However I choose to measure “duration”, any cashflows received before maturity, duration > maturity. Simples...
Less trivial become callable corporate bonds, and/or MBS pre-payments. The former allow the borrower to prepay their debt earlier than term. The latter simply allow borrowers to not only repay, but refinance at fixed future long-term rates. Either shortens financial “duration”, compared to legal “maturity”.
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$\begingroup$ Or floating rate notes, which can have long maturities but have a duration approximately zero. $\endgroup$ – Chris Taylor Mar 23 at 13:17
