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Duration is a linear measure of how the price of a bond changes in response to interest rate changes. As interest rates change, the price does not change linearly, but rather is a convex function of interest rates. Convexity is a measure of the curvature of how the price of a bond changes as the interest rate changes.
The more curved the price function of the bond is, the more inaccurate duration is as a measure of the interest rate sensitivity. [2] Convexity is a measure of the curvature or 2nd derivative of how the price of a bond varies with interest rate, i.e. how the duration of a bond changes as the interest rate changes. [3] Specifically, one assumes ...
While effective duration is a broader measure of interest rate risk, key rate duration offers a granular view, helping investors identify vulnerabilities in different parts of the yield curve.
An interest rate is the amount of interest due per period, ... exemplified by the higher yields typically demanded for longer-duration assets. For instance, while a 1 ...
Formally, the duration gap is the difference between the duration - i.e. the average maturity - of assets and liabilities held by a financial entity. [3] A related approach is to see the "duration gap" as the difference in the price sensitivity of interest-yielding assets and the price sensitivity of liabilities (of the organization) to a change in market interest rates (yields).
Duration is a measure of the price sensitivity of a stock to changes in the long term interest rate, i.e., the longer the duration, the more sensitive the stock is to interest rates. In U.S. stock markets, an SEC rule adoption in 1982 (rule 10b-18) that allowed discretionary stock buybacks has distorted the calculation of duration based on ...
Other types of interest to consider. Fixed and variable rates aren’t the only type of interest rates to keep in mind when you’re shopping around for a financial product.
An immunization strategy is designed so that as interest rates change, interest-rate risk and reinvestment risk will offset each other. However, as Dr. Frank Fabozzi points out, the Macaulay duration metric and immunization theory are based on the assumption that any shifts in the yield curve during the planning period will be parallel, i.e ...