WEBVTT

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Duration tells investors the length of time in years

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that it will take the bonds cash flows to repay the investor

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the price he or she paid for the bond.

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A bond duration tells us how much a bonds

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price might change when interest rates

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change a higher duration number means a

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bonds price is more sensitive to

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interest rate changes while a lower

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duration number means a bonds price is

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less sensitive to interest rate changes

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this means that the price of a bond with

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a duration of five will increase or

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decrease by five percent when interest

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rates move by one percent a Long's

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duration depends on its interest rate

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call features yield credit quality and

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maturity the shorter the bond term the

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lower the duration and vice versa also

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the lower the coupon the higher the

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duration and vice-versa Christine has a

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bond with a 10-year maturity a 0.15

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percent yield to maturity a 2.25 percent

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annual rate a $1000 par value and

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quarterly coupon payments its duration

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is nine point one Michael has a similar bond

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with a 30-year maturity a zero

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point three five percent yield to

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maturity a 4.25 percent annual rate a

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$1000 par value and quarterly coupon

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payments its duration is fifteen point

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three two suppose the Federal Reserve

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announces changes in its interest rate

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policy and interest rates increase

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Christine's bond will decrease in value

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but Michaels bond will experience a

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bigger decrease because of its higher

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duration similarly if interest rates were to decrease Michaels bond would

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gain more value than christine's again

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because of its higher duration duration

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is just one factor that affects a Bloods value inflation risk default risk and

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call risk are also important but duration tells investors like Christine

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and Michael how much risk they face from interest rate changes.