In bond analysis, duration has gone beyond the concept of time, and investors use it to measure the sensitivity of bond price changes to interest rate changes. After some corrections, the impact of interest rate changes on bond prices can be accurately quantified. The longer the correction lasts, the more sensitive the bond price is to the change of yield, the greater the decline of bond price caused by the increase of yield, and the greater the increase of bond price caused by the decrease of yield. It can be seen that under the same factors, the amendment was made.
It is the above characteristics of duration that provide reference for our bond investment. When we judge that the current interest rate level is likely to rise, we can focus on investing in short-term varieties and shorten the duration of bonds. When we judge that the current interest rate level is likely to decline, we should lengthen the duration of bonds and increase the investment in long-term bonds, which can help us get a higher premium in the rise of the bond market.
It should be noted that the concept of duration is widely used not only in a single bond, but also in a bond portfolio. A long-term bond and a short-term bond can be combined into a medium-term bond portfolio. Increasing the investment ratio of a certain type of bond can make the duration of this portfolio tilt towards the duration of this type of bond. Therefore, investors should accurately judge the future interest rate trend when operating large amounts of funds, and then determine the duration of the bond portfolio.
Duration is a method to measure the average duration of bond cash flow. Because the price sensitivity of bonds will increase with the increase of maturity time, duration can also be used to measure the sensitivity of bonds to interest rate changes. Duration is calculated according to the weighted average of each coupon interest or principal payment time of bonds.
The duration is calculated just like the weighted average. The variable is time, the weight is the cash flow of each period, and the price is equivalent to the sum of the weights (because the price is calculated by discounted cash flow method). In this way, the calculation formula of duration is a weighted average formula, so it can be regarded as the average time to recover costs.
Duration determines the sensitivity of bond prices to changes in market interest rates, including three factors: duration, coupon rate and yield to maturity.
Different bond prices have different sensitivities to changes in market interest rates. Bond maturity is the most important and main criterion to measure this sensitivity. Duration is equal to the price change caused by the change of interest rate by one unit. If the market interest rate changes by 65,438+0% and the bond price changes by 3, the duration is 3.