Bond Duration

Bond Duration

Duration: The weighted average life of a bond; the weights are based on the present value of cash flows. The YTM is the discount rate used.

Purpose of Duration: Duration is used to determine the price sensitivity of a bond.

Percentage change in the value of a bond approximately = Duration X Interest Rate Change

Approximation formula is more accurate for interest rate declines vs. interest rate increases
As the bonds increases in maturity, the approximation formula is less accurate

1. If a bond has a duration of 5.4 years, and interest rates decline by 1 percent, the bond will appreciate/depreciate by approximately how much?

2. If a bond has a duration of 15.6 years, and interest rates decline by 1 percent, the bond will appreciate/depreciate by approximately how much?

3. If a bond has a duration of 1.4 years, and interest rates decline by 4 percent, the bond will appreciate/depreciate by approximately how much?

4. If a bond has a duration of 15.6 years, and interest rates decline by 4 percent, the bond will appreciate/depreciate by approximately how much?

5. Three factors that determine the value of duration are 1) ________________, 2) ________________, and 3) ____________.

6. What is the duration of a bond that matures in three years with an annual coupon rate of 8% and YTM of 12 percent?

7. What is the duration of a bond maturing in 5 years with a coupon rate of 8% and YTM of 12 percent?

8. What is the duration of a bond maturing in 10 years with a coupon rate of 8% and YTM of 12 percent?

9. What is the duration of a bond that matures in three years with an annual coupon rate of 6% and YTM of 12 percent?

11. What is the duration of a bond maturing in 5 years with a coupon rate of 6% and YTM of 12 percent?

12. What is the duration of a bond that matures in three years with an annual coupon rate of 8% and YTM of 8 percent?

13. What is the duration of a bond maturing in 5 years with a coupon rate of 8% and YTM of 8 percent?

14. What is the duration of a bond that matures in one year?

15. What is the duration of a zero-coupon bond that matures in 30 years?

16. As market rates of interest increase, the duration increases/decreases? Why?

17. As the coupon rate rises, the duration increases/decreases? Why?

18. As the maturity of a bond increases, the duration increases/decreases? Why?

19. How could a bond with a shorter maturity have a longer duration?

20. The longer the duration, the _____________ (greater/lesser) the impact of a change in interest rates on price.

Last Updated: November 27, 2000