# Your company owns the following bonds: |Bond |Market Value| Duration |A |$13 Million|2 |B |$18...

## Question:

Your company owns the following bonds:

 Bond Market Value Duration A $13 Million 2 B$18 million 4 C \$20 million 3

If general interest rates rise from 8% to 8.5%, what is the approximate change in the value of the portfolio?

## Bond Duration:

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.

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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.,

• (1...

Interest Rate Risk: Definition, Formula & Models

from

Chapter 3 / Lesson 6
11K

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.