# CH06 - 6-1Chapter 6The Risk of Changing Interest...

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Unformatted text preview: 6-1Chapter 6The Risk of Changing Interest Rates6-2Short Horizon InvestorsnMaturityTimeP1, the price at Time 1, is important.PP1yy116-3Long Horizon InvestorsPCC + PARMaturityTimeReinvestValue at some distant date n is important.12Cn6-4Duration as an Approximation of Price ChangePriceInterest rateSlope of tangent equals numerator of durationActual price change equals P - P1Duration approximation of price changeequals P - P1PriceTangentPP1P1yy16-5DELTA PRICE = [ -DP/DY][DELTA Y](DELTA PRICE)/P =[ (-DP/DY)/P][DELTA Y](DELTA PRICE)/P = [DUR][DELTA Y]6-6An Intuitive Interpretation of DurationPercentPrice [Duration][Yield Change].Change6-7Macaulays Duration (DUR)Often used by short horizon investors as a measure of price sensitivity.DUR= % change in price as yield changes= .-[dP/dy](1+y)Price6-8This expression may be interpreted as the weighted average maturity of a bond....
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## CH06 - 6-1Chapter 6The Risk of Changing Interest...

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