When they say duration is a good measure of intrest rate risk for parallel shifts in the yeild curve, do they mean… *a parallel shift of the Spot yield curve of a single bond or *parallel shift of the yield curve of a portfolio of bonds ( each bonds in the portfolios ytm shifts by an equal amount) Thanks!
A parallel shift is when the yield on all bonds with different maturities shifts by the same amount. Duration is only useful for parallel shifts.
small parallel shifts only.
adq123 Wrote: ------------------------------------------------------- > When they say duration is a good measure of > intrest rate risk for parallel shifts in the yeild > curve, > do they mean… > > *a parallel shift of the Spot yield curve of a > single bond > > or > > *parallel shift of the yield curve of a portfolio > of bonds ( each bonds in the portfolios ytm shifts > by an equal amount) > > Thanks! Yield curve has yields on y axis and maturity on x axis. It shows you yields at different maturities. Duration is a good measure when yields of every maturity bond increase/decrease by the same amount. Duration of portfolio will accurately describe the interest rate risk if yield curve shift is parallel. Else, we need to use key rate duration (I know you didn’t ask this… just revising!)