PROPERTIES OF DURATION

Now that we understand what duration is, and how it is calculated, lets take a look at some of the important properties of duration. 1. Duration of a coupon paying bond is always less than its maturity. For a non-coupon paying bond, the duration is the same as its maturity. 2. Bonds with longer maturities have longer durations. This is because the coupon payments will be spread over longer periods and will be more affected by inflation. 3. The bond with higher coupon rates have lower duration, and vice versa. 4. When the coupon rate is lower than the yield, the duration first increases with maturity to some maximum value then decreases to the asymptotic limit value. As the time to maturity increases to infinity, the duration does not increase to infinity but tends to a finite limit independent of the coupon rate. 5. The duration of a bond increases immediately on the day a coupon is paid. However, throughout the life of the bond, the duration is continually decreasing as time to the bonds maturity decreases. MACAULAYS DURATION

D is the bond's duration C is the periodic coupon payment F is the face value at maturity (in dollars) T is the number of periods until maturity r is the periodic yield to maturity t is the period in which the coupon is received

BOND CONVEXITY
In finance, convexity is a measure of the sensitivity of the duration of a bond to changes in interest rates, the second derivative of the price of the bond with respect to interest rates (duration is the first derivative). In general, the higher the convexity, the more sensitive the bond price is to the change in interest rates. Bond convexity is one of the most basic and widely-used forms ofconvexity in finance.