Here are some notes on the properties of duration notes in detail:
- Duration is a linear measure of interest rate risk. This means that a change in interest rates will cause a proportional change in the price of a bond. 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 time-weighted measure of interest rate risk. This means that the cash flows that are further in the future have a greater impact on the duration of a bond than the cash flows that are closer to maturity.
- Duration is a convex measure of interest rate risk. This means that the percentage change in the price of a bond will be greater than the proportional change in interest rates. For example, if a bond has a duration of 5 years and interest rates increase by 2%, the price of the bond will decrease by more than 10%.
Here are some additional things to keep in mind about the properties of duration 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.