When we developed duration as a time measure, we didn’t consider the pos-
sibility of negative duration. However, we can now look at that concept. Under
what conditions could modified duration be negative?
If modified duration is negative, then dP/dYmust be positive. The slope of
the yield/price curve must be positive. That means that increasing yield must
increase price. Under what conditions could that happen?
If the bond has a call feature that is, or soon will be, in effect and is selling
at a yield close to the coupon rate, then a decrease in yield will not increase
price. The bond is already selling as high as it can ...
Become an O’Reilly member and get unlimited access to this title plus top books and audiobooks from O’Reilly and nearly 200 top publishers, thousands of courses curated by job role, 150+ live events each month, and much more.