Bond duration
Bond duration is like a magic trick from your favorite magician! Imagine your mom promises to give you 5 chocolate bars after she finishes her work in a few hours. But before she brings those chocolates, you want to know how long you will have to wait until you get them, just in case you get bored waiting. This is where bond duration comes in!
A bond is like a big chocolate bar that a company or government sells to raise money. And, the bond duration is like a tool that helps us figure out how long it will take for us to receive a certain amount of money from the bond, usually in the form of interest payments.
The bond duration is affected by different factors like the amount of time until the bond matures, how often interest is being paid, and how volatile the interest rates are.
For example, let's say you bought a bond that pays interest every 6 months for 10 years, and the interest rate is fixed at 5%. The bond has a duration of 9.132 years. This means that if interest rates suddenly increased, the bond's value would fall by approximately 9.132% for each 1% increase in interest rates, and if interest rates decreased, the bond's value would increase by a similar percentage.
So, in simpler terms, bond duration helps us understand how much the value of the bond will change if interest rates change. It is like a crystal ball that tells us how long we need to wait to receive our money (like that chocolate bar) from the bond and how much it may go up or down in value due to interest rate changes.
A bond is like a big chocolate bar that a company or government sells to raise money. And, the bond duration is like a tool that helps us figure out how long it will take for us to receive a certain amount of money from the bond, usually in the form of interest payments.
The bond duration is affected by different factors like the amount of time until the bond matures, how often interest is being paid, and how volatile the interest rates are.
For example, let's say you bought a bond that pays interest every 6 months for 10 years, and the interest rate is fixed at 5%. The bond has a duration of 9.132 years. This means that if interest rates suddenly increased, the bond's value would fall by approximately 9.132% for each 1% increase in interest rates, and if interest rates decreased, the bond's value would increase by a similar percentage.
So, in simpler terms, bond duration helps us understand how much the value of the bond will change if interest rates change. It is like a crystal ball that tells us how long we need to wait to receive our money (like that chocolate bar) from the bond and how much it may go up or down in value due to interest rate changes.
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