Bond Math / Questions

Question 1

What is duration?

Answer 1

• How sensitive a bond price is to a change interest rates

Question 2

How does duration work?

Answer 2

• How long, in years, it takes for an investor to be repaid the bonds price by the bond’s total cash flows

Question 3

1% change in interest rates

Answer 3

• for a 1% change in rates and bonds price will change 1% for each year in duration in the opposite direction

Question 4

How does time to maturity affect duration?

Answer 4

• the longer the maturity, the higher the duration and the greater the interest rate risk

Question 5

How does coupon rate affect duration?

Answer 5

• the higher the coupon rate the lower the duration and lower the interest rate risk
• b/c bond w/ a higher coupon will pay back its original costs faster