Course 102: Bond Duration
Bond Duration Defined
In this course
1 Introduction
2 Bond Values, Rates, and Maturity
3 Bond Duration Defined
4 Properties of Bond Duration
5 Duration and Bond Interest Rate Risk
6 Duration Is a Guide to Selecting Bonds

Bond investors are faced with reinvestment--the threat that if interest rates fall, the interest payments and principal that investors receive will have to be reinvested at lower rates. This is important because the yield-to-maturity calculation assumes that all payments received are reinvested at the exact same rate as the original bond's coupon rate. However, this is rarely the case. As a result, brokers and portfolio managers try to account for reinvestment risk by calculating a bond's duration--the number of years required to recover the true cost of a bond, considering the present value of all coupon and principal payments received in the future. Duration can be used to compare bonds with different issue and maturity dates, coupon rates, and yields to maturity. The duration of a bond is expressed as a number of years from its purchase date.

Next: Properties of Bond Duration >>


Search
Print Lesson |Feedback
Del.icio.us Del.icio.us | Digg! digg it
Learn how to invest like a pro with Morningstar’s Investment Workbooks (John Wiley & Sons, 2004, 2005), available at online bookstores.
Copyright 2010 Morningstar, Inc. All rights reserved. Please read our Privacy Policy.
If you have questions or comments please contact Morningstar.