What is the duration of a 10-year bond?

The 10-year Treasury note is a debt obligation issued by the United States government with a maturity of 10 years upon initial issuance. A 10-year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity.

What is the duration of the bond portfolio?

Portfolio duration is commonly estimated as the market-value-weighted average of the yield durations of the individual bonds that compose the portfolio. The total market value of the bond portfolio is 170,000 + 850,000 + 180,000 = 1,200,000.

What does duration tell you about the sensitivity of a bond portfolio?

Instead, duration signals how much the price of your bond investment is likely to fluctuate when there is an up or down movement in interest rates. The higher the duration number, the more sensitive your bond investment will be to changes in interest rates.

Why do immunized bond portfolio still have to be rebalanced periodically?

While an increase in rates hurts a bond’s price, it helps the bond’s reinvestment rate. Maintaining an immunized portfolio means rebalancing the portfolio’s average duration every time interest rates change, so that the average duration continues to equal the investor’s time horizon.

How can bond portfolio duration be reduced?

Adjusting the total modified duration of a portfolio to investor’s specifications is simple with the help of futures contracts. By selling (or buying) futures contracts, it is possible to decrease (or increase) the total modified duration of the portfolio.

How do you immunize a bond portfolio?

To immunize a bond portfolio, you need to know the duration of the bonds in the portfolio and adjust the portfolio so that the portfolio’s duration equals the investment time horizon. For example, suppose you need to have $50,000 in five years for your child’s education. You might decide to invest in bonds.

Is your immunized portfolio perfectly hedged against interest rate changes Why or why not?

Immunization is a risk-mitigation strategy that matches asset and liability duration so portfolio values are protected against interest rate changes.

Which two factors cancel out for an immunized portfolio?

Just like a vaccine immunizes a body against infection, immunization leaves a portfolio safeguarded against interest rate fluctuations. Duration, or the average life of a bond (which is also its price sensitivity to changes in interest rates), is commonly used in immunization.

What does the Macaulay duration tell us?

Macaulay duration is the weighted average of the time to receive the cash flows from a bond. It is measured in units of years. Macaulay duration tells the weighted average time that a bond needs to be held so that the total present value of the cash flows received is equal to the current market price paid for the bond.