How to Calculate Duration of Coupon Bond refers to the technique used to quantify the price sensitivity of a coupon bond to yield changes. It serves as a risk measure that helps bondholders understand how much the bond’s value will fluctuate based on interest rate movements. For instance, a bond with a duration of 5 years would lose approximately 5% of its value if interest rates were to increase by 1%.
Calculating bond duration is crucial for portfolio management, risk assessment, and making informed investment decisions. It enables investors to estimate the potential impact of interest rate shifts on their bond portfolio and can help them adjust their strategies accordingly. Historically, the concept of bond duration was first introduced in the 1960s by Frederick Macaulay. His influential work laid the foundation for our understanding of bond price dynamics.