Author(s)

Zhenyu Wei

Corresponding Author

Zhenyu Wei

ABSTRACT

For public investors, most of them will choose to invest bonds since they are low-risk investment choices. Therefore, it is of great importance to analyze the risks of bonds, and duration is one of the convenient strategies. Based on the studies and research made by different people, this paper summarizes the advantages and disadvantages for duration strategy to assess interest rate risks of a bond primarily. In the disadvantage part, there important assumptions in duration model are listed. In addition, due to these disadvantages, author makes a comparison on duration, effective duration, modified duration and convexity, in terms of which disadvantages of duration they have solved. Besides, this paper will discuss influencing factors that affect the approximation of duration model, such as default and call risks, and non-parallel movement of the yield curve. In the last part, author briefly concludes opinions discussed about in previous parts, then put forward some individual thoughts and perspectives.

KEYWORDS

Duration evaluation, Advantages and disadvantages, Effective duration, factors, comparison