Here are some notes on duration of bond notes in detail:
- Duration is a measure of how sensitive the price of a bond is to changes in interest rates. It is calculated as the weighted average of the time to maturity of the bond’s cash flows.
- A bond with a longer duration will be more sensitive to changes in interest rates than a bond with a shorter duration. This is because the longer-duration bond will have more cash flows that are further in the future, and these cash flows will be more sensitive to changes in interest rates.
- Duration can be used to calculate the percentage change in the price of a bond if interest rates change. For example, if a bond has a duration of 5 years and interest rates increase by 1%, the price of the bond will decrease by approximately 5%.
- Duration is a useful tool for managing interest rate risk. Investors who are concerned about interest rate risk can choose bonds with a shorter duration.
There are two main types of duration:
- Macaulay duration: This is the most common type of duration. It is calculated as the weighted average of the time to maturity of the bond’s cash flows.
- Modified duration: This is a modified version of Macaulay duration that takes into account the coupon payments of the bond. It is calculated as:
Modified Duration = Macaulay Duration / (1 + r)
where r is the current interest rate.
Here are some additional things to keep in mind about duration of bond notes:
- Duration is not a perfect measure of interest rate risk. It does not take into account the volatility of interest rates, or the fact that the cash flows of a bond may not be perfectly paid as scheduled.
- Duration can be used to calculate the price sensitivity of a bond portfolio. The price sensitivity of a bond portfolio is the total percentage change in the value of the portfolio if interest rates change.