9.13 Duration Rules Summary
We have so far, stated the following definitions and explained some rules regarding Coupon Rate, YTM, Dollar Price, and (Macauley) Duration.
Definitions / Observations:
- (Macaulay) Duration is the Weighted Average Life of the Present Value of the Bond’s Cash Flows. It is expressed in terms of years.
- Duration is a measure of volatility. The longer the duration, the greater the volatility.
Inferences:
- When Coupon increases, Dollar Price goes up.
- When Coupon increases, Duration goes down.
- A Zero-coupon bond, our base case, has the longest Duration, equal to its maturity.
- When YTM increases, Dollar Price goes down.
- When YTM increases, Duration goes down.
- Dollar Price and Duration are positively related (relative to YTM).
- As yield decreases, price volatility increases. The curve gets steeper.
| If this increases | Then this increases |
| Coupon | Dollar Price |
| If this increases | Then this decreases |
| Coupon | Duration |
| If this increases | Then, both of these decrease |
| YTM | Dollar Price |
| Duration |
