Interview Question: Family of Durations

Sample Question #156 (finance – bond pricing)

Explain each of the following concepts and their differences. How do you calculate them?

  1. Duration
  2. Macaulay duration
  3. Modified duration
  4. Effective duration

(Comment: detailed bond pricing questions like this are actually not common at non-fixed income interviews, although if your resume says you know fixed income, you can expect questions like this)

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One Response to Interview Question: Family of Durations

  1. Brett says:

    ANSWER
     
    1. Generic term referring to a measure of bond’s price sensitivity to interest rate change.
    2. Original definition.
    3. Adapted from Macaulay duration for cases when interest rate is quoted on an annualized basis
    4. Used when the bond has a built-in option, such as callable bonds
     

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