How do you calculate duration of a bond portfolio?
Hereof, how do you calculate duration of a bond?
The formula for the duration is a measure of a bond's sensitivity to changes in interest rate and it is calculated by dividing the sum product of discounted future cash inflow of the bond and a corresponding number of years by a sum of the discounted future cash inflow.
Also, what is the formula for duration? The formula is complicated, but what it boils down to is: Duration = Present value of a bond's cash flows, weighted by length of time to receipt and divided by the bond's current market value. As an example, let's calculate the duration of a three-year, $1,000 Company XYZ bond with a semiannual 10% coupon.
In respect to this, what is duration on a bond?
Duration is an approximate measure of a bond's price sensitivity to changes in interest rates. If a bond has a duration of 6 years, for example, its price will rise about 6% if its yield drops by a percentage point (100 basis points), and its price will fall by about 6% if its yield rises by that amount.
Why is Bond duration important?
Duration is important to bond investors because it acts as a guide for how sensitive a bond (or bond portfolio) is to changes in interest rates. Specifically, when yields rise, a bond's price will fall by an amount approximately equal to the change in the yield, multiplied by the duration of the bond.