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Fixed IncomeModule 4 of 5

Interest Rate Risk and Duration

5

Concepts

5

Formulas

1

Decisions

4

Quiz Questions

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Key Concepts

5 concepts covered in this module.

Duration

Measure of bond price sensitivity to yield changes. Higher duration = more price volatility. Approximate % price change for 1% yield change.

Macaulay Duration

Weighted average time to receive cash flows. In years. Duration of zero-coupon = maturity.

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Formulas

5 essential formulas for this module.

Modified Duration

ModDur = MacDur / (1 + y/m)

Where: y = YTM, m = compounding periods per year

Price Change (Duration)

ΔP/P ≈ -ModDur × Δy

Where: First-order approximation

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Decision Frameworks

1 decision frameworks to guide your analysis.

How to manage interest rate risk?

  • Match duration of assets and liabilities (immunization)
  • Extend duration if expecting rates to fall
  • Shorten duration if expecting rates to rise

Mind Map

Visual overview of how concepts connect in this module.

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Flashcard

Duration

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Answer
Measure of bond price sensitivity to yield changes. Higher duration = more price volatility. Approximate % price change for 1% yield change.
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Fixed-Income Bond Valuation

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Credit Risk and Credit Analysis