Interest Rate Risk - Duration
4 important questions on Interest Rate Risk - Duration
What is the duration (e.g. of a bond)? Also denote the formula.
The duration represets the exposure of a portfolio to yield curve movements. It's the weighted average of the times until the fixed cash flows are received.
D = -( 1/S) * (dS/dy)
Denote the duration formula computed from S.
S = sum (CF*e^-yt) (the bond price computed from it's discounted cash flows)
D = sum( t * ((CF*e^-yt)/S))
Denote Maculay's duration formula. In what way does it change the previous duration formula?
The formula substitutes continues compounding with frequency compounding. The Macaulay's (modified) duration is an adaption from the ' standard' D-formula.
D* = D / (1 + y/m)
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When we have a portfolio of bonds and P is the value of this portfolio, denote the formula we use to compute the duration when a small parallel shift in the yield curve appears.
D = -(1/P) * (dP/dy)
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