August 2010
Beginner to intermediate
495 pages
11h 48m
English
Content preview from Fixed-Income Securities and Derivatives Handbook, Second Edition
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CHAPTER 2
Bond Instruments and Interest Rate Risk
Chapter 1 described the basic concepts of bond pricing and yield. This chapter discusses the sensitivity of bond prices to changes in market interest rates and the key related concepts of duration and convexity.
Duration, Modified Duration, and Convexity
Most bonds pay a part of their total return during their lifetimes in the form of coupon interest. Because of this, a bond’s term to maturity does not reflect the true period over which its return is earned. Term to maturity also fails to give an accurate picture of the trading characteristics of a bond or to provide a basis for comparing it with other bonds having similar maturities. Clearly, a more accurate measure is needed.
A bond’s maturity ...
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