Bond_Duration - BondDuration PriceandYieldRelationship

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Bond Duration
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Price and Yield Relationship Price and Yield have  negative or inverse  relationship If yield increases, the bond price will go down If yield decreases, the bond price will go up
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Bond’s price sensitivity When yield changes, the price of bond changes too. Therefore, bond have  price sensitive to yield  changes . Different bonds have different level of sensitiveness 1 Basis point = 0.01% of interest
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Bond’s price sensitivity Two main variables affect level of bond’s price  sensitivity Coupon Rate   lower coupon rate, higher price  sensitivity Time to maturity   longer time, higher price  sensitivity
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Duration Macaulay’s Duration   weighted average term to  maturity of cash flows from the bond (weighted by  present value of future cash flow) D = Σ t=1 n (1+i) t t * CF t P
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Usage of Macaulay’s Duration Interest Rate Risk Price Risk Reinvestment Risk Bond immunization   matching planned investment  horizon with bond duration
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Bond_Duration - BondDuration PriceandYieldRelationship

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