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.