Yield vs duration

CFA Level III
#1

Dear all,

I have read the below statement in the document referred below

‘yield increases then duration will decrease’

Can anyone please provide me with an example or refer me to another document, where this is explained with examples.

(source)

https://www.palgrave.com/finance/valdez6/students/bond_price.pdf

Thank you

#2

I mean this as nicely as possible, but I highly doubt anybody is going to respond to your threads posted in the last couple of days. We’ve just spent the last 6+ months thinking about this stuff, duration, convexity, FX rates, and anything like that is probably the last thing I and most people on here want to think about.

Go take a break TTKDD! We’ve all earned it!

#3

The easiest way to see that for normal bonds duration decreases as yield increases is to look at a price/yield curve: the slope of the curve is steep for low yields, and flattens out (becomes less steep) for higher yields.

(Yes, I realize that the slope of the price/yield curve is not the (negative of the) duration; it’s the (negative of the) dollar duration. However, it still works quite well for a visualization. If you want to be completely accurate, draw a ln(price)/yield curve (natural logarithm of price on the y-axis, yield to maturity on the x-axis); the slope of that curve is the (negative of the) duration of the bond. Note that if you’re just sketching, the curves will look identical.)

#4

Krazykanuck,

People like me are required here.

We make sure things do not rust (lol).

Hope your exams went well.

Rgds

#5

While S2000 is much more technical, I think of it this way:

If I get paid more for holding a bond (increase in yield), then I have less risk of being repaid by the issuer since I receive more money today. More money today mans that the bond that I hold is less sensitive to changes in interest rates (lower duration) since I am receiving more money today (higher yield) in the form of coupons.

This is not as technical of an answer as S2000, but it makes sense for me. Alternately, I just think about the graphs that he mentioned above…

Hope this helps!