Duration and Interest Rate Risk. Why Study Duration. Duration: measures the sensitivity of bond price change on interest rate change Objective: to see how much price change in bond value due to interest rate changes – a way to gauge interest rate risk. What is Duration?
A measurement of the life of the bond on a present value basis
Formula for Duration
How to Calculation Duration
- find bond price
- find discounted cash flow in each period
- go through the worksheet
Calculate Duration on a $1000 Ten-year 10% Coupon Bond When its interest rate is 10% (Table 4)
Calculate Duration on a $1000 Ten-year 10% Coupon Bond When its interest rate is 20% (Table 5)
Exercise the duration of the bond.
Calculating duration for an 11-year 20% coupon bond when current interest rate is 10%
For a 10 year, 20% coupon bond, DUR = 5.72 Yrs, if interest rate increases from 10% to 11%
Duration and Interest-Rate Risk rate increases from 10% to 11%