A Simplified Approach to Measuring Bond Duration
DOI:
https://doi.org/10.1016/1057-0810(95)90016-0Abstract
Because interest rates vary over time, the realized return on a fixed-income investment will depend on the price at which the instrument is ultimately liquidated and the rate at which interim cash flows are reinvested. This variation in realized return, known as interest-rate risk, should be addressed by both individual and institutional investors. Tools for measuring the impact and adjusting for the effects of interest rate changes on fixed-income instrument performance have long been available with duration and its companion adjustment factor, convexity. In this article, a simplified alternative to the traditional complex duration calculation is developed and demonstrated. Thus, anyone who can calculate a bond price can quickly estimate the interest rate risk associated with a bond as well as calculate the expected bond price change for a given change in market yield-to-maturity.
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