Duration investopedia definition
How does duration affect the price of a bond?
Duration can help predict the likely change in the price of a bond given a change in interest rates. As a general rule, for every 1% increase or decrease in interest rates, a bond’s price will change approximately 1% in the opposite direction for every year of duration.
Why is duration a useful concept?
Recall that duration is a useful concept, because it pro-vides a good approximation, particularly when interest-rate changes are small, of thesensitivity of a security’s market value to a change in its interest rate using the fol-lowing formula: interest rate
What is duration-at-worst?
Duration-at-Worst is also used by those who do nothave access to the modeling tools neededto compute Effective Duration.Effective Duration is the only one ofthe three duration measures discussedhere which reflects the impact of embed-ded options on a bond’s interest rate sen-sitivity.
What is option-adjusted duration?
In the mid-1980s, as interest rates began to drop, several investment banks developed the concept of ‘option-adjusted duration’ (or ‘effective duration’), which allowed for the calculation of price movements given the existence of call features. Duration can help predict the likely change in the price of a bond given a change in interest rates.
[PDF File]Duration - New York University
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The dollar duration of $1 par of a t-year zero is € d t (r t)= 1 (1+r t /2) 2t d t '(r t)= −t (1+r t /2) 2t+1 € $dur t =−d t '(r t)= t (1+r t /2) 2t+1 Dollar duration is minus the slope of price-rate function. For zeroes, we can use calculus to get the formula: For $N par of the zero, both the price and the dollar duration would be N ...
[PDF File]Understanding Duration - BlackRock
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developed the concept of ‘option-adjusted duration’ (or ‘effective duration’), which allowed for the calculation of price movements given the existence of call features. Utilizing Duration Duration can help predict the likely change in the price of a bond given a change in interest rates. As a general rule, for every 1% increase or decrease
[PDF File]Implied Equity Duration: A New Measure of Equity Risk
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We derive an expression for implied equity duration by adapting the traditional expression for bond duration and develop an algorithm for its empirical estimation. We find that the standard empirical predictions and results for bond duration hold for our measure of implied equity duration.
[PDF File]A Guide to Duration, DV01, and Yield Curve Risk Transformations
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DV01, also called dollar duration, PV01 (present value of an 01), or BPV (basis point value), measures the derivative in price terms: the dollar price change per change in yield. Modified duration measures the derivative in percent terms as a semi-elasticity: the percent price change per change in yield.
[PDF File]Duration - New York University
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Duration 2 Duration Definition: The duration of a bond is a linear approximation of the percent change in its price given a 100 basis point change in interest rates. (100 basis points = 1% = 0.01) For example, a bond with a durati on of 7 will gain about 7% in value if interest rates fall 100 bp.
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