Your company owns the following bonds:
If general interest rates rise from 8% to 8.5%, what is the approximate change in the value of the portfolio?
The duration of a bond is a measure of the bond's interest rate risk. For any coupon bond, its duration cannot exceed the remaining term to maturity and decreases with coupon rate.
Answer and Explanation:
We first compute the duration of the portfolio, which is the average of the duration of the bonds weighted by the market value of each bond, i.e.,
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fromChapter 3 / Lesson 6
Interest rate risk is really the risk of two different events (price reduction and reinvestment rate reduction) caused by a change in interest rates. Interest rate risk affects bond investments, but the good news for bond investors is that it can be mitigated or eliminated.