why the straight bond with lower yield will have great duration than the straight bond with the higher yield? shouldn’t the duration be correspondingly changed by “yield change in percentage”? someone plz explain,thx
Remember the higher the yield the less you are effected by interest rates which in turn means less sensitivity…, the other point is that the numerator will be larger than that of a higher yield bond. Please do correct me if i’m wrong.
Well if you think of duration in terms of a measurement of how long it takes for the price of a bond to be repaid by its internal cash flows, then a higher YTM will discount the bond at a faster rate (i.e. holder will receive repayments for the security at a faster rate).
tester - if you think about in the terms you mentioned then %change will exactly explain how this works. A 1% change in interest rates will obviously have a greater impact on the price of a 5% YTM bond (i.e. 1/5 of the yield) than on a 10% bond (only 1/10 of the yield).
suzmis Wrote: ------------------------------------------------------- > Well if you think of duration in terms of a > measurement of how long it takes for the price of > a bond to be repaid by its internal cash flows, > then a higher YTM will discount the bond at a > faster rate (i.e. holder will receive repayments > for the security at a faster rate). does the same theory to explain coupon up->duration down?
oh, i just find this also helpful Re: Duration and Market Yields Posted by: steph96 (IP Logged) [hide posts from this user] Date: October 20, 2008 02:49PM If you think of the downward sloping curve, then the curve is steeper when the market yields are lower. A steeper curve means greater changes in price when the market yield changes; thus, higher duration.
“why the straight bond with lower yield will have great duration than the straight bond with the higher yield?” Just isn’t true. Take a 10-yr semiannual pay 5% bond selling at par and a 10-yr seminannual pay bond 1% selling to yield 8%.