NAME : RAJENDRA BHALSHINGE

ROLL NO : 240
SUBJECT : DEBT MARKET
TOPIC : DURATION
SUBMITTED TO
PROF . NAGRAJ SIR
DURATION

• Duration is an empirical method of measuring the true life of a bond

portfolio
• Comes into play in determing how to manage a bond portfolio
• Duration is a measure of effectivity maturity of a bond , defined as the
wiegted average of the maturities of each payment with weights
proportional to the present value of the payment
PROPOSITIONS REGARDING INTEREST RATE
SENSITIVITY
1 . Bond prices and yield are inversely related
2. An increase in the yield of maturity result in a smallerprices decline than the price gain
associated with a decreacse of equal magnitude
3. Price long term bond tend to be more sensitive to interest rate changes than price to short term
bond
4. The sensitivity of bond price to change in yield increase at a decreace rate as maturity increase
5. Interest rate risk is very inversely related to the bonds coupen rate so , price of high coupon
bond are less sensitive to change in interest price of low coupin bond
INTEREST RATE SENSITIVITY

• Maturity of bond is a major determination of interest rate risk

• - consequitely the concept of duration the actual term of a bond portfolio is critical to
assessing the riskness of bond portfolio
• Higher coupon bonds are less price sensitivity than low coupon bonds
• - and zero coupon bonds are consequity the most sensitivity of all
• Zero coupon are thus also considered a longer term investment
MODIFIED DURATION

• Practitioners actually use a concept called modified duration

• - modified duration = duration { 1 + yield }
• You can use modified duration to project the new price of a bond whenever there is a
change in yield
• - the change in price = { - modified duration change in yield }
CONCLUSION REGARDING DURATION

• Using modified duration to predict changes in price v . Actual change becomes imprecise
for large interest rate movement
• Nonethless , duration is key to managing fixed income security portfolio for three reasons
• - it is effective measure of the average maturity of a portfolio
• It provides a tool for immunizing portfolio from interest rate at risk
• It is measure of interest rate sensitivity of a bond portfolio
RULES REGARDING DURATION

• The duration of zero coupon bond equals their time to maturity

• Holding time and yield to maturity constant a bonds duration and interest rate sensitivity
are higher when the coupon rate is lower
• Holding the coupon rate constant a bonds duration and interest rate sensitivity generally
increase with time to maturity
• Holding other factors constant the duration and interest rate sensitivity of a coupon bond
are higher when the yield of maturity is lower
CONCLUSION

Bond price are said to have an inverse relationship with interest

rate . Therefore rising interest rates indicates bond prices are
likely to fall while decling interest rate bond price are likely to
rise
It is change in price of bond if there is changing in interest