Dollar Duration

Deciphering Dollar Duration: Understanding Bond Price Sensitivity

Explore the intricacies of dollar duration, a vital metric used by bond fund managers to gauge interest rate risk and portfolio sensitivity.

Delve into the concept of dollar duration and its significance in assessing the impact of interest rate changes on bond values.

Understanding Dollar Duration:

Learn how dollar duration quantifies the dollar change in a bond's value in response to fluctuations in market interest rates
Discover the mathematical formula behind dollar duration calculations and its practical application in bond management
Explore the limitations of dollar duration and its effectiveness in capturing interest rate risk

Facts:

Dollar duration, also known as DV01, is used by bond fund managers to assess the interest rate risk of fixed income portfolios. (source)
The concept of dollar duration extends beyond individual bonds and can be applied to various fixed income products, including forwards, par rates, and zero-coupon bonds. (source)
While dollar duration provides a useful approximation of interest rate sensitivity, its accuracy may be limited by factors such as non-linear relationships between bond prices and interest rates. (source)

Contrast dollar duration with alternative methods of assessing bond price sensitivity, such as Macaulay duration and modified duration.

Comparing Duration Methods:

Understand the differences between dollar duration, Macaulay duration, and modified duration in measuring bond price sensitivity
Explore the advantages and limitations of each duration method and their practical implications for bond investors

Examine the constraints and assumptions underlying dollar duration calculations and their implications for bond management.

Limitations of Dollar Duration:

Consider the impact of negative sloping linear relationships and parallel yield curve movements on the accuracy of dollar duration
Evaluate the assumptions of fixed rates and interval payments in dollar duration calculations and their relevance in dynamic market conditions