Bond Duration: A Pedagogic Illustration

Abstract

In view of the importance of reliable duration measures for bond immunization strategies, this paper considers, from a pedagogic perspective, the duration concept. Both a basic bond model and a more realistic bond model, which accounts for the accrued interest, are considered. The use of graphical features and scroll bars in Microsoft ExcelTM allows the duration concept to be delivered via an interactive approach. This paper also addresses an unresolved issue on bond duration. Specically, it explains why a saw-toothed time pattern of traditionally-defined duration exists and provides a corrective measure, which is easy to implement on Excel. Analytical materials pertaining to bond duration, as well as illustrative examples based on actual bond quotation data, are provided.