Interview Question: Bond Duration

Sample Question #61 (finance – bond pricing)

What’s a bond’s duration (aka its Macaulay duration)? How do you calculate it? Why is it such an important concept?

(Hint: for the last question, think volatility)

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One Response to Interview Question: Bond Duration

  1. Brett says:

    ANSWER
     
    Duration is a weighted average of term-to-maturity of the bond’s cash flows, where the weights are PV(cash flow in period t) / Price of bond (Fabozzi, Fixed Income Mathematics, ch. 13). The mathematical formula can be found here. Its importance lies its link to the bond price change.

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