There are two ways to calculate the duration of a bond portfolio:
Limitations: This method cannot be used for bonds with embedded options or for floating-rate notes due to uncertain future cash flows. The cash flow yield is not commonly calculated. The change in cash flow yield is not necessarily the same as the change in the yields-to-maturity on the individual bonds. Interest rate risk is not usually expressed as a change in the cash flow yield.
This method is simpler to use and quite accurate when the yield curve is flat. Its main limitation is that it assumes a parallel shift in the yield curve.
To illustrate this calculation, consider the following three-bond portfolio in which all three bonds are option-free:
In this illustration, it is assumed that the next coupon payment for each bond is exactly six months from now (i.e., there is no accrued interest). The market value for the portfolio is $9,609,961. Since each bond is option-free, modified duration can be used.
The portfolio's duration is: 0.416 (3.861) + 0.440 (8.047) + 0.144 (9.168) = 6.47.
A portfolio duration of 6.47 means that for a 100 basis point change in the yield for each of the three bonds, the market value of the portfolio will change by approximately 6.47%. Keep in mind that the yield for each of the three bonds must change by 100 basis points for the duration measure to be useful. This is a critical assumption and its importance cannot be overemphasized.
| WaheedAbbasKhan: can anyone help? what does this mean?|
"10% 5-year 100.0000 10 $4 million $4,000,000 3.861"
10% copuon - 5Year Maturity - FV100 - next?
| zackychoo: 10 is 10%, the interest rate.|
$4 mill is the total par val of the bonds
$4,000,000 is the total market value of the bonds, which is equal to par value because coupon rate is equal to interest rate.
3.861 is the duration.
|papajeff: This is hands down the shittiest part of the whole course.|
| johntan1979: Nah... this is an easy piece of shit.|
Econ is the worst, whether micro or macro.
| gill15: This is easy crap. Problem is i think nobody reads the notes as we're nearing the end of lessons....|
Accounting ---- by far the worst and most boring --- Taxes still scare me..
|ldfrench: This sections sucks. Accounting sucks too.|
|farhan92: eco is fun -except the global eco! Fixed income is just shitty|
| sandra1010: Can someone help?|
How did you get the market value of 4,231,375?
|bemccall95: sandra1010 you do the par value of 5,000,000 times the discount value of 0.846275 to get the market value|