Fin630 GDB

Duration: The Most Common Measure of Bond Risk   (Alisha)

Duration, the most commonly used measure of bond risk, quantifies the effect of changes in interest rates on the price of a bond or bond portfolio. The longer the duration, the more sensitive the bond or portfolio should be to changes in interest rates.

Duration incorporates a bond's yield, coupon, final maturity and call features into one number, expressed in years, that indicates how price-sensitive a bond or portfolio is to changes in interest rates. There are a number of ways to calculate duration, but the generic term generally refers to effective duration, defined as the approximate percentage change in a security’s price that will result from a 100-basis-point change in its yield.

The duration of a fixed income assets or liability is the price sensitivity relative to its own yield. Therefore when we use duration for hedging purpose, we are implicitly assuming that the yield levels of the various assets and liabilities move in parallel, that is, in equal amounts. In fact however, the yields of different credit, coupon, or maturity sectors of the market move differently. This difference is known as the bais risk among the sectors.

The duration of a fixed-income asset (or liability) is a measure of its price sensitivity relative to its own yield. It is well recognized that duration fails to capture the exposure of a portfolio to changes in the shape of the yield curve. This form of interest rate risk, referred to as yield curve risk, can be significant in portfolios containing options, some mortgage derivatives, and most exotic securities. The authors present a risk measure that is more complete than simple measures such as duration that can be used in measuring the yield curve. This "risk-point measure" can be applied to various active and structured portfolio strategies.

NOTE: - These Assignments OR Quiz are just for idea, so kindly don't copy it, after viewing it make your own. Thanks

Thanks to those students those send me Assignments and quizzes. If you have any Assignment and quiz kindly send at jamilbookcenter@yahoo.com