0:00:05.810,0:00:09.140
Duration tells investors the length of time in years

0:00:09.140,0:00:12.129
that it will take the bonds cash flows to repay the investor

0:00:12.129,0:00:14.210
the price he or she paid for the bond.

0:00:14.210,0:00:17.110
A bond duration tells us how much a bonds

0:00:17.110,0:00:18.940
price might change when interest rates

0:00:18.940,0:00:21.550
change a higher duration number means a

0:00:21.550,0:00:23.259
bonds price is more sensitive to

0:00:23.259,0:00:25.359
interest rate changes while a lower

0:00:25.359,0:00:27.519
duration number means a bonds price is

0:00:27.519,0:00:29.279
less sensitive to interest rate changes

0:00:29.279,0:00:32.049
this means that the price of a bond with

0:00:32.049,0:00:34.150
a duration of five will increase or

0:00:34.150,0:00:36.550
decrease by five percent when interest

0:00:36.550,0:00:38.950
rates move by one percent a Long's

0:00:38.950,0:00:40.990
duration depends on its interest rate

0:00:40.990,0:00:43.960
call features yield credit quality and

0:00:43.960,0:00:46.570
maturity the shorter the bond term the

0:00:46.570,0:00:49.300
lower the duration and vice versa also

0:00:49.300,0:00:51.040
the lower the coupon the higher the

0:00:51.040,0:00:54.010
duration and vice-versa Christine has a

0:00:54.010,0:00:57.070
bond with a 10-year maturity a 0.15

0:00:57.070,0:01:00.280
percent yield to maturity a 2.25 percent

0:01:00.280,0:01:03.550
annual rate a $1000 par value and

0:01:03.550,0:01:05.950
quarterly coupon payments its duration

0:01:05.950,0:01:09.040
is nine point one Michael has a similar bond

0:01:09.040,0:01:11.620
with a 30-year maturity a zero

0:01:11.620,0:01:13.390
point three five percent yield to

0:01:13.390,0:01:16.600
maturity a 4.25 percent annual rate a

0:01:16.600,0:01:19.750
$1000 par value and quarterly coupon

0:01:19.750,0:01:22.270
payments its duration is fifteen point

0:01:22.270,0:01:25.120
three two suppose the Federal Reserve

0:01:25.120,0:01:27.190
announces changes in its interest rate

0:01:27.190,0:01:29.290
policy and interest rates increase

0:01:29.290,0:01:31.870
Christine's bond will decrease in value

0:01:31.870,0:01:34.000
but Michaels bond will experience a

0:01:34.000,0:01:35.920
bigger decrease because of its higher

0:01:35.920,0:01:38.380
duration similarly if interest rates were to decrease Michaels bond would

0:01:40.420,0:01:42.790
gain more value than christine's again

0:01:42.790,0:01:45.159
because of its higher duration duration

0:01:45.159,0:01:47.080
is just one factor that affects a Bloods value inflation risk default risk and

0:01:52.150,0:01:54.310
call risk are also important but duration tells investors like Christine

0:01:54.310,0:01:56.620
and Michael how much risk they face from interest rate changes.