"Fixed Income":Interest rate risk

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Questions 1:

Which of these definitions of duration is most relevant to a bond investor? A bond’s duration is its:

A、 price sensitivity to yield changes.

B、 first derivative of value with respect to its yield.

C、 half-life.

Questions 2:

The following table provides information about a portfolio of three bonds.

Fixed Income:Interest rate risk

Based on this information, the duration of the portfolio is closest to:

A 、9.48.

B、 9.35.

C、 9.74.

View answer resolution

【Answer to question 1】A

【analysis】

A is correct. Bond investors are concerned about interest rate risk, and duration is a good measure of interest rate risk.

B is incorrect because while duration was first measured using the calculus, referring to it in this way is confusing for investors who are unfamiliar with calculus or might confuse it with a derivative security.

C is incorrect because while it’s true that duration is the weighted-average maturity or half-life for some bonds, for others the duration has nothing to do with maturity (e.g., an interest only strip security.)

【Answer to question 2】B

【analysis】

B is correct. The market values of the bonds (Price × Par amount) are $17,479,376, $4,018,928, and $6,771,416, respectively, for a portfolio value of $28,269,720. Therefore, the duration of the portfolio is

Fixed Income:Interest rate risk