Duration and Change in Yields why, therefore, increase, general

spartan1

I know that the general rule is that if market yield rates increase, duration decreases.

However, none of the reading that I've been doing explains why that happens. I'm so confused. In my mind, a higher market yield would imply a lower present value of future bond associated cash flows and therefore a higher duration.

Please help!

Bluetick1010

think of price-yield curve, it a convex shaped curve, price is more indifferent toward yield change than it is when yields are low.

FVPV

Think of duration (interest rate risk) as the slope of the price yield profile. As you move to the right (higher yields) the sloper get flatter (moves towards zero), which indicates lower sensitivity to changes in interest rates.

Beatnik

The price yield curve has a convex shape. The Intrest rate risk cannot be easily determined if the slope of yield curve is non-linear so to get a linear relationship between Bond value and yield a new term DURATION is introduced.

Duration is termed as price sensitivity of a bond to change it yield.The approx percentage is asumed to be constant for a rise or decline in the yield.In short the Duration can be assumed as the slope of the linear relation between bond value and yield.As the slope is constant for a given line the value of duration remains the same for a specified yield curve.

The statement "Market yield rates increase duration decreases." implies that when the market yield increases Bond value decreases(linearly) i.e duration.

Hope that this solves your problem and not complicate it further......



Edited 1 time(s). Last edit at Monday, April 12, 2010 at 09:44AM by khotmanish.

bapswarrior

So...still a little mixed up with maturity-to-duration

If maturity has high interest rate sensitivity but a low duration... - How is maturity reflected in the price/yield curve?


Would a high-yielding, 30-year CMO have a high duration or a low duration?



Edited 1 time(s). Last edit at Wednesday, April 14, 2010 at 10:28AM by bizzies4bankers.