 # duration interpreted

105 The duration of a fixed-income portfolio is best interpreted as the: A. first derivative of the price function for the bonds in the portfolio. B. total number of years to receive the present value of the portfolio’s cash flows. C. percentage change in the portfolio’s value if interest rates change by 100 basis points. D. weighted average number of years to receive the present value of the portfolio’s cash flows. I pick C, but what’s wrong with D.

Present Value is what’s wrong.

it would be weighted average of time to received cash flows. that has nothing to do with present value.

Guys, I think this is the explanation A. first derivative of the price function for the bonds in the portfolio. (False. It is the first derivative of the price-yield relationship of a security divided by the initial price of the security). B. total number of years to receive the present value of the portfolio’s cash flows. (False because to calculate the Duration of a Portfolio we use the weighted sum of the single effective duration) C. percentage change in the portfolio’s value if interest rates change by 100 basis points. (True…we have to consider the Parallel shift) D. weighted average number of years to receive the present value of the portfolio’s cash flows.(False as explained in question B ) Hence, I assue is C.

Duration is the first derivative on the price-yield relationship, not divided by the initial price. A is wrong because we are dealing with a portfolio, and not a single security. B and D are wrong because of PV.

wyantjs Wrote: ------------------------------------------------------- > Duration is the first derivative on the > price-yield relationship, not divided by the > initial price. A is wrong because we are dealing > with a portfolio, and not a single security. B > and D are wrong because of PV. wyantjs, how you do calculate a derivative? I am pretty sure about it…so I think u are wrong

I stand corrected. I wasn’t considering the difference that a basis point has on the decimal place.