Topic 4 - Bonds ((ii) Duration and interest rate sensitivity. Duration and expected return of bonds.)

Question 1

Interest Rate Risk - Duration

Answer 1

• The market price of a bond is inversely related to changes in interest rates—> Bond prices decrease when interest rates increase.
• Duration is a measure of the sensitivity of a bond’s price to changes in interest rates.

• Duration:
• A weighted-average maturity of a bond.
• The weighted average of the times until each
payment is received
• Weight of a given cash flow = Present value of
the cash flow expressed as a fraction of
the current bond price

• It is shorter than maturity for all bonds, and is equal to maturity for zero coupon bonds.