- CFA Exams
- CFA Level I Exam
- Topic 1. Quantitative Methods
- Learning Module 8. Hypothesis Testing
- Subject 3. Test Statistic and Significance Level
CFA Practice Question
User Contributed Comments 7
| User | Comment |
|---|---|
| kevin | from schweser: For coupon paying bonds, duration is less than maturity.
Duration is approximately equal to the point in years where the investor receives half of the present value of the bond's cash flows. Since zero-coupon bonds only have one cash flow at maturity, the duration is approximately equal to maturity. Any coupon amount will shorten duration because some cash flow is received prior to maturity. I am confused. As far as I know, duration is a measure of the price sensitivity of a bond to a change in yield. But maturity is a time unit. How can we connect them together? Any answer is greatly appreciated. |
| lawrence | The longer the duration the more price sensitive the bond is. A change in interest rate affect distant cashflows more than present cashflows. There are also different measures of duration with different meaning. |
| Jimish | hey see coupon paying bond are less sensitive because the cash flows are delated.. cuase when cash flows are delayed.. the appropriate discount rate also increases.. its the simple time... discount factor.. so as the zero coupon bond delays all the coupon till maturity... it has a greater duration.. as duration measures the interest sensitivity...... the most sensitive would be the one whose payment are deferred the most... i hope u got it now |
| freyalam | kevin, There is an advice that we ignore the unit (usually stated in years) and we need to interpret it as: A duration of x years = for 1% change in YTM, the bond's value will change approximately x % "approximately" because we are assuming the effective duration as a linear function between the yield rate and bond's value while it is convex. |
| johntan1979 | For those who are using Schweser and don't trust AnalystNotes, please direct your questions to Schweser, since you paid a hefty price for it. While AnalystNotes may not be perfect, many of us are here for the same reasons... value for money, and more comprehensive coverage of the CFA curriculum. |
| jmorris | Jimish is correct. If we recall from the previous reading (was one of the basic bond valuation concepts), i sensitivity is greater on issues with long time horizons. These issues have an inherent discount built in to their PV. |
| fobucina | Duration Gap = Mac Dur - Investment Horizon --> determines which risk (price or reinvestment) dominates |