Yield-Based Bond Duration Measures and Properties

Prior lessons explored two sources of interest rate risk—reinvestment risk and price risk—and demonstrated how holding a bond for its Macaulay duration balances them. This lesson and those that follow extend that discussion by introducing measures of price risk. Two broad categories of such measures exist: those that assume underlying bond cash flows are certain and measure price sensitivity to changes in a bond’s own yield, which are covered in these lessons, and those that introduce the possibility of a bond default and that measure price sensitivity to changes in a benchmark yield curve, which are covered in later lessons. This lesson will illustrate how the interest rate risk of a bond is a function of its features, including its time-to-maturity, coupon rate, and yield.