2.4 Bond Risks and Duration
Managing fixed-income portfolios requires quantifying duration and recognizing credit, purchasing power, call, liquidity, and reinvestment risks.
Key NASAA Exam Takeaways
- Duration measures a bond's price sensitivity to interest rate fluctuations in years.
- Zero-coupon bonds have a duration exactly equal to their maturity.
- For coupon-paying bonds, duration is always less than maturity.
- Convexity measures the rate of change of duration as interest rates change.
- Interest rate risk and reinvestment risk are opposing forces: when interest rates rise, bond prices fall, but reinvestment return increases.
Interactive Knowledge Checkpoint • Section 2.4
Which of the following bonds exhibits the greatest price sensitivity to changes in interest rates?