Term
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Definition
the number of years (on a present value
basis) that it takes a security to recapture the initial investment (on a present value basis). |
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Term
| Duration Properties: Duration and maturity |
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Definition
as maturity increases, so does duration, continuously, except when
bonds are selling at a deep discount
the duration for bonds which pay no periodic cash (zero coupon
bonds), the duration is the maturity of the bond |
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Term
| Duration Properties: Duration and yield |
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Definition
duration and market yields are inversely related (because the present
value of distant cash flows gets exponentially smaller, and the weight
given to distant time periods in the numerator of duration also gets
smaller, lowering duration) |
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Term
| Duration Properties: Duration and coupon rates |
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Definition
| inversely related, higher coupon interest recaptures the investment faster |
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Term
| Duration Properties: Duration and Price Changes |
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Definition
For a given change in market yields, percentage changes in asset prices are
proportional to, but of opposite sign from, the asset's duration. |
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Term
| Portfolio Management Implications |
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Definition
A portfolio manager can "immunize" a portfolio (i.e., reduce the combined
reinvestment rate risk and interest rate risk) by purchasing a "portfolio" with a duration equal the desired holding period. |
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