Duration of a bond.

[Paul_G]

Hi guys,

I'm a technologist so appologies for the simplistic question.

I'm examining Bond Duration in John Hull. I understand the concept and the derivations etc. I understand the concepts on the change in yield to the price change and modified duration etc.

If I have a bond of duration of say 2.76, this is the time weighted average for payment... is this figure used in trading for anything 'else'. i.e. I know it can be used for the calculation for changes in price to yield, but I mean is the actual figure of 2.76 used for anything in its own right. For example is it used to find alternative like bonds also with a duration of around this figure?

Thanks in advance.
Paul

 

[trader3cnd]

Quote from Paul_G:

Hi guys,

I'm a technologist so appologies for the simplistic question.

I'm examining Bond Duration in John Hull. I understand the concept and the derivations etc. I understand the concepts on the change in yield to the price change and modified duration etc.

If I have a bond of duration of say 2.76, this is the time weighted average for payment... is this figure used in trading for anything 'else'. i.e. I know it can be used for the calculation for changes in price to yield, but I mean is the actual figure of 2.76 used for anything in its own right. For example is it used to find alternative like bonds also with a duration of around this figure?

Thanks in advance.
Paul

It is used for cash flow immunization and portfolio selection.

The lower the duration the more liquid the portfolio is.

Also, duration of a coupon bond is the equivalent maturity of a zero coupon bond with the same yield.

So you can use duration to buy a zero coupon instead.

 

[Paul_G]

That's great, I appreciate it.

I do have another question for anyone though.

If I have the Par Yield for a bond, what would I use that for? I understand that its the coupon rate that causes the bond to be its par value. Is is simply to indicate simply that the bond it trading above/below par?

Thanks,
Paul