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Duration is a linear measure of how the price of a bond changes in response to interest rate changes. It is approximately equal to the percentage change in price for a given change in yield, and may be thought of as the elasticity of the bond's price with respect to discount rates. For example, for small interest rate changes, the duration is ...
The average duration of the bonds in the portfolio is often reported. The duration of a portfolio equals the weighted average maturity of all of the cash flows in the portfolio. If each bond has the same yield to maturity, this equals the weighted average of the portfolio's bond's durations, with weights proportional to the bond prices. [1]
The more curved the price function of the bond is, the more inaccurate duration is as a measure of the interest rate sensitivity. [2] Convexity is a measure of the curvature or 2nd derivative of how the price of a bond varies with interest rate, i.e. how the duration of a bond changes as the interest rate changes. [3]
Bond prices and interest rates are closely related and can both be used to forecast economic activity, so investors should at least be aware of the basics: how interest rates affect bond prices ...
= P/E base for a no-growth company = reasonably expected 7 to 10 Year Growth Rate of EPS = the average yield of AAA corporate bonds in 1962 (Graham did not specify the duration of the bonds, though it has been asserted that he used 20 year AAA bonds as his benchmark for this variable [5])
Rising interest rates have almost no effect on bonds that are set to mature in a year or less, while they can really hurt the price of bonds that mature in 30 years, for example. 2. The issuer’s ...
In financial mathematics, the Ho-Lee model is a short-rate model widely used in the pricing of bond options, swaptions and other interest rate derivatives, and in modeling future interest rates. [1]: 381 It was developed in 1986 by Thomas Ho [2] and Sang Bin Lee. [3] Under this model, the short rate follows a normal process:
Tree-based bond option valuation: 0. Construct an interest-rate tree, which, as described in the text, will be consistent with the current term structure of interest rates. 1. Construct a corresponding tree of bond-prices, where the underlying bond is valued at each node by "backwards induction":