method to calculate duration is the. In terms of standard bonds (for which cash flows are fixed and positive this means the Macaulay duration will equal the bond maturity only for a zero-coupon bond. Modified duration is a rate of change, the percent change in price per change in yield. The 15-year bond would lose 9 (-15 6) if rates rose the same amount.
Investments in bonds and bond funds are subject to interest rate, credit, and inflation risk. CFidisplaystyle CF_i is the cash flow of the idisplaystyle i th payment from an asset, tidisplaystyle t_i is the time in years until the idisplaystyle i th payment will be received (e.g. Yield to Maturity The sensitivity of a bonds price to interest rate changes also depends on its yield to maturity (YTM). Because the formula is complicated and time consuming, most investors use calculators to do the math. It is often measured per 1 basis point - DV01 is short for "dollar value of an 01" (or 1 basis point). PV01 (present value of an 01) is sometimes used, although PV01 more accurately refers to the value of a one dollar or one basis point annuity. Heres an example: Assume you want to buy a 15-year bond that dropbox coupon yields 6 for 1,000, or a 10-year bond that yields 3 for 1,000. Alternatively, and often more usefully, convexity can be used to measure how the modified duration changes as yields change. Factors that Affect Duration, certain factors can affect a bonds duration, including: Time to maturity. It is equal to the maturity if and only if the bond is a zero-coupon bond. Consider two bonds that each yield 5 and cost 1,000, but have different maturities. Securities Industry and Financial Markets Association, isbn.
A two-year semi-annual would be represented by a tidisplaystyle t_i index.5,.0,.5, and.0 ykdisplaystyle y_k is the yield to maturity for an asset, periodically compounded Vdisplaystyle V is the present value of all cash payments from the asset. The standard reference for conventions applicable to US securities. Modified duration can be expressed as the percent change in price per one percentage point change in yield per year (for example yield going from 8 per year (y.08) to 9 per year (y.09).