Fixed Income Markets
Stress a bond portfolio
What you will learn
Translate position durations into portfolio rate risk.
Approximate portfolio return = sum of each weight × duration × negative yield change
Market-value weights can combine modified durations when positions are exposed to a common small yield change. When different maturities move differently, stress each position against its own yield change. Convexity and optionality matter for larger moves. A fictional portfolio with 60% in duration 3 and 40% in duration 8 has a weighted duration of 5.0.
A fictional portfolio with 60% in duration 3 and 40% in duration 8 has a weighted duration of 5.0.
Market-value weights can combine modified durations when positions are exposed to a common small yield change. When different maturities move differently, stress each position against its own yield change. Convexity and optionality matter for larger moves. A fictional portfolio with 60% in duration 3 and 40% in duration 8 has a weighted duration of 5.0.
Which weights belong in a first-order price return approximation?