Reading 57: Yield-Based Bond Duration Measures and Properties

Book 3: Fixed Income

Macaulay Duration

the weighted average time, in years, it takes to receive a bond’s cash flows

Modified Duration

the percentage change in a bond’s price for a 1% change in YTM

Modified Duration =

Macaulay Duration/(1+YTM)

Is modified duration a convex or linear relationship?

linear

Price Value of a Basis Point (PVBP)

the money change in the full price of a bond when its YTM changes by one basis point

Money Duration

annual ModDur x full price of a bond position

Duration

measure of a bond’s price sensitivity to changes in interest rates

How could increasing maturity doesn’t always increase duration?

it’s a weighted average

if you go way far out, the cash flows are going to be discounted to such a degree that they have no effect on the duration

a discount bond it will decrease

Which has greater interest rate risk—lower or higher coupon?

lower

What decreases duration—an increase or decrease in YTM?

an increase

way out future cash flows are discounted by a greater % and therefore add less weight to duration

As time slowly passes and YTM remains constant, how is duration effected by the passage of time?

duration steadily declines but then spikes on the day of a coupon payment as now there is more time until the next coupon payment