Click here to read the original article on ETFdb.com.
Related Posts:- No Related Posts
Why Duration Matters
January 29, 2014 at 19:00 PM EST
A major fixed income strategy in 2013 was duration rotation, investors reducing the interest rate risk of their portfolios. As the term “duration” becomes increasingly prevalent in our conversations on The Blog and elsewhere, I thought it would be good to explain this concept. What is Duration? Duration measures the sensitivity of a bond’s price to changes in interest rates. The higher the duration, the higher the interest rate risk. To get a better sense of what this means lets use as an example a five year maturity bond that pays a 3% coupon rate. Let’s say that you buy this bond today at a price of $100. Tomorrow interest rates rise up to 4%. In this new market you could buy a five year maturity bond with a 4% coupon for $100. Given that you can now get a 4% bond for $100, it seems likely that the 3% [...] Click here to read the original article on ETFdb.com. Related Posts: No Related Posts
A major fixed income strategy in 2013 was duration rotation, investors reducing the interest rate risk of their portfolios. As the term “duration” becomes increasingly prevalent in our conversations on The Blog and elsewhere, I thought it would be good to explain this concept. What is Duration? Duration measures the sensitivity of a bond’s price to changes in interest rates. The higher the duration, the higher the interest rate risk. To get a better sense of what this means lets use as an example a five year maturity bond that pays a 3% coupon rate. Let’s say that you buy this bond today at a price of $100. Tomorrow interest rates rise up to 4%. In this new market you could buy a five year maturity bond with a 4% coupon for $100. Given that you can now get a 4% bond for $100, it seems likely that the 3% [...]
