Risk of Bond Portfolio
If a bond portfolio only invests in low-risk, long-term bonds (Treasuries mainly) and the average maturity of the portfolio is 15 years, what is the primary risk one would face? How would you measure that risk?
The main measures of risk on a bond portfolio is duration. Duration is the first derivative of a bond, the time weighted average of a bonds cash flow discounted byy the bonds yield. it is a measure of the price sensitivity of a bond to changes in interest rates. Bonds or bond porfolios with higher duration values are more sensitive to changes in rates than bonds with lower duration. Duration is expressed in years, because duration can also be expressed as the time it takes for you to get your money back.
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