Modified duration is used to measure the percentage price change of a bond given a change in its yield-to-maturity. A related statistic is money duration. The money duration of a bond is a measure of the price change in currency units. Money duration (MoneyDur) is the product of the annualized modified duration and the full price (PVFull) of the…
Details
or Without the negative sign, this is known as a bond’s modified duration, or ModDur: The change in annualised yield-to-maturity: Approximate Modified Duration
Details
The general calculation of Macaulay duration, MacDur, that also accounts for partial coupon periods if the calculation is done between coupon dates where Finally, another approach to calculating Macaulay duration is to use a closed-form equation derived using calculus and algebra, where
Details
Fixed-rate bond investors have three sources of return:
Par Rates from Spot Rates An important use of spot rates is determining par rates. A par rate is a yield-to-maturity that makes the present value of a bond’s cash flows equal to par (100% of face value). Par rates derived for hypothetical government bonds with different times-to-maturity are commonly used for term structure analysis because they control for…
Details
Maturity Structure of Interest Rates Suppose that the yield-to-maturity is higher on one bond compared to another bond. There are several possible reasons for the difference, including credit risk, different currencies, liquidity, tax differences, and the periodicity assumption used in the yield calculation. This factor explaining the differences in yields is called the maturity structure of…
Details
There are several important differences in yield measures quoted for money market instruments versus bonds: The pricing formula for money market instruments quoted on a discount rate basis. where The unique characteristics of a money market discount rate The pricing formula for money market instruments quoted on an add-on rate basis. where
Details