Question of the Week

One way to determine the volatility of a bond is to calculate its duration. Duration takes into consideration all of the following EXCEPT:

A) Debt to equity ratio
B) Income generated by the coupons
C) Hedging strategies
D) Average maturity


Answer:

The correct answer is a):

Duration is the change in the value of a fixed income security that will result from a 1% change in interest rates. Duration takes into consideration the average maturity of the bonds in the portfolio, the income generated by the coupons, any option-writing income, and any hedging strategies that have been employed by that particular fund.