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Modified duration macaulays duration divided by 1yield

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Unformatted text preview: to maturity. Term structure of interest rates - The relationship between yields to maturity and terms to maturity across bonds. Expectations hypothesis - the theory that yields to maturity are determined solely by expectations of future short- term interest rates. Forward rate - The inferred short- term rate of interest for a future period that makes the expected total return of a long- term bond equal to that of rolling over short- term bonds. Managing Bond Portfolio [Chapter 11] Interest Rate Risk – see handout Duration - A measure of the average maturity of the bond's promised cash flows. Macaulay’s Duration - A measure of the effective maturity of a bond, defined as the weighted average of the times until each payment, with weights proportional to the present value of the payment. Modified Duration - Macaulay's duration divided by 1+yield to maturity. Measures interest rate sensitivity of bond. What Determines duration 1. The duration of a zero- coupon bond equals it's time to maturity 2. With time to maturity and yield to maturity held constant, a bond's duration and interest rate sensitiv...
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