"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.
Based on this information, the duration of the portfolio is closest to:
A 、9.48.
B、 9.35.
C、 9.74.
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.)
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
A is incorrect because it bases the weights on par values rather than market values.
C is incorrect because it is the simple arithmetic average of the bonds’ durations.
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