Sample interview questions: Can you explain the concept of bond duration?
Sample answer:
- Bond Duration:
- A measure of a bond’s price sensitivity to changes in interest rates.
- Duration is expressed in years and can be interpreted as the weighted average of the times until each of a bond’s cash flows is received.
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Longer duration bonds are more sensitive to interest rate changes than shorter duration bonds.
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Bond Duration Formula:
Modified Duration = (PV1 * T1 + PV2 * T2 + … + PVn * Tn) / Bond Price - PV = Present value of each cash flow
- T = Time until each cash flow is received
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n = Number of cash flows
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Key Points:
- Duration is a measure of interest rate risk.
- Duration can be positive or negative.
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The longer the duration, the greater the interest rate risk.
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Applications:
- Duration is used by investors and portfolio managers to manage interes… Read full answer
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