Question

During a stress test where interest rates jump unexpectedly, which specific mathematical property of a bond portfolio determines the size of the price drop?

Accepted Answer

The specific property you are looking for is called duration. Think of duration as a measure of how sensitive a bond’s price is to changes in interest rates. When interest rates go up, bond prices go down. Duration tells you exactly how much that price will fall. It is calculated by looking at how long it takes to get your money back from the bond’s interest payments and its final face value. Imagine a seesaw where the interest rate is on one side and the bond price is on the other. A bond with a high duration is like a very long seesaw; even a small nudge in interest rates creates a massive swing in the price. A bond with a low duration is a short, sturdy seesaw that stays much steadier when interest rates move. If you know the duration of your portfolio, you can multiply it by the jump in interest rates to quickly estimate your total loss.

During a stress test where interest rates jump unexpectedly, which specific mathematical property of a bond portfolio determines the size of the price drop?

The specific property you are looking for is called duration. Think of duration as a measure of how sensitive a bond’s price is to changes in interest rates. When interest rates go up, bond prices go down. Duration tells you exactly how much that price wi....

Community Answers

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During a stress test where interest rates jump unexpectedly, which specific mathematical property of a bond portfolio determines the size of the price drop?

The specific property you are looking for is called duration. Think of duration as a measure of how sensitive a bond’s price is to changes in interest rates. When interest rates go up, bond prices go down. Duration tells you exactly how much that price wi....

Community Answers