# Is effective duration the same as average duration?

## Is effective duration the same as average duration?

While Effective Duration is a more complete measure of a bond’s sensitivity to interest rate movements versus the Macauley or Modified Duration measures, it still falls short because it is a linear approximation for small changes in yield; that is, it assumes that duration stays the same along the yield curve.

What is the difference between effective duration and key rate duration?

Key rate duration While the effective duration measures bond sensitivity to a parallel shift in the benchmark yield curve, the key-rate duration measures the sensitivity of a bond’s price to a change in the shape of the yield curve i.e. steepening or flattening.

### What is an effective duration?

Effective duration is a duration calculation for bonds that have embedded options. The impact on cash flows as interest rates change is measured by effective duration. Effective duration calculates the expected price decline of a bond when interest rates rise by 1%.

Is effective duration the same as option adjusted duration?

Typically duration is calculated based on the date to which the bond is priced. An alternative measure of duration – known as “option-adjusted duration” or “effective duration” – takes into account the effect of the call option on the expected life of a bond.

#### Is maturity the same as duration?

In plain English, “duration” means “length of time” while “maturity” denotes “the extent to which something is full grown.” The higher a bond’s duration, the more the bond’s price will change when interest rates move, thus the higher the interest rate risk.

Can effective duration be negative?

Effective duration and spread duration are usually positive, though effective duration may be negative in some situations (as I mentioned above). Key rate durations for par and premium bonds are generally positive, but key rate durations for key rates for less than the maturity on discount bonds are usually negative.

## How does YTM affect duration?

Duration is inversely related to the bond’s coupon rate. Duration is inversely related to the bond’s yield to maturity (YTM). Duration can increase or decrease given an increase in the time to maturity (but it usually increases). You can look at this relationship in the upcoming interactive 3D app.

Why is duration lower than maturity?

The duration of any bond that pays a coupon will be less than its maturity, because some amount of coupon payments will be received before the maturity date. The higher a bond’s coupon, the shorter its duration, because proportionately more payment is received before final maturity.

### Why is duration matching better than maturity matching?

Duration is the weighted-average maturity of the cash flows of the debt or asset. While duration-matching doesn’t eliminate the interest rate risk, it can manage the exposure for relatively minor changes in interest rates.

What are the two types of duration?

There are two types of duration: Macaulay duration and modified duration.

#### What is the difference between DV01 and duration?

DV01 = Price * Duration / 10,000, or more exactly: (yield-based) DV01 = Price * (Modified) Duration / 10,000. both give the (linear, approximate) estimate of bond price change for a shift in yield, DVO1 (in \$, for 1 bsp), modified duration (in % terms, for 1 unit change).

How to calculate dollar duration ( DV01 ) formula?

What is DV01 (Dollar Duration)? DV01 or Dollar Value of 1 basis point, measures the interest rate risk of bond or portfolio of bonds by estimating the price change in dollar terms in response to change in yield by a single basis point ( One percent comprise of 100 basis points ).

## What does DV01 stand for in bond market?

What is DV01 (Dollar Duration)? DV01 or Dollar Value of 1 basis point, measures the interest rate risk of bond or portfolio of bonds by estimating the price change in dollar terms in response to change in yield by a single basis point (One percent comprise of 100 basis points

What is the definition of year based DV01?

Year-based DV01: defined as the change in the price from a one-basis point increase in the yield of a bond. DVDZ or DPDZ: defined as the change in price from a one-point increase in all spot rates. DVDF or DPDF: defined as a change in price from a one-basis point increase in the forward rate.