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Investment theory- The concept of Duration - Essay Example
Finance & Accounting
Pages 4 (1004 words)
Name Instructor Course Date The concept of bond duration The concept of duration is widely applied in the financial and investment sectors for bond analysis, determining interest rates among other applications. This discourse tends to explain or simplify two basic duration concepts…
However, those with good mathematical understanding are made to understand the concepts behind bond duration through some proven mathematical formula, and this imply the correlation between changes in the bond values and the fluctuations in the interest rates. There are two basic applications of the duration principles and these greatly vary with the kind of risk involved as well as the investment strategy put in place. Duration could be used as a measure of bond values persistent investors or those willing to take deadly business risks. Such investors are known to embrace active business strategies and benefit from the anticipated alterations or fluctuations in the interest rates due to changes in the bond durations. However, for non risk takers, duration act as a tool of protecting bond values from certain fluctuations due to fluctuations in the interest rates. Bond protection in this case is kind of a assurance that the bond value is likely to remain stable irrespective of changes in the prevailing interest rates, hence it encourage investors to buy certain bonds as they are not scared of changes in interest rates. Majority of financial analysts assumes that the graph of bond prices verses interest rates is flat, meaning there is major effects of fluctuations in the interest rates on bond prices, and this is not correct as various mathematical formulas can be employed to certify this. ...