Duration and Key Rate Duration

CFA Level II Fixed Income
#1

Hi,

Duration is basically the sensitivity of the bond’s price to change in the yield. I’m confused as to how to interpret the the number. For Example, for a 15 year bond trading at par, if we arrive at a maturity matched duration of 11.94, then, what does this number mean? How to interpret?

Thank you

#2

It means that if the 15-year par rate increases 1% (and all other par rates are unchanged) the price of the bond will decrease by about 11.94%.

#3

Thank you Sir… how do we interpret the same say in number of years? Since the price of the bond will decrease by about 11.95%, will the duration of the bond increase beyond 15 years to recover the cash flows?

The question is stupid because i’m confused since sometimes duration is referred to as number of years and sometimes as a % change in price.

Thanks!

#4

Duration measures the linear sensitivity of the bond’s value to changes in interest rates, it has nothing to do with the number of years to maturity. Assuming no credit event, the coupon payments and principal repayment should happen as scheduled.