PLZ ... ANY ONE CLARIFY ME ON THIS
while going through bond valuation in sfm, there is a concept of "duration"
what exactly does it mean??? apart from the descripttion of formula given..
2 Replies
CS Bijoy
(Expert)
(6394 Points)
Replied 24 September 2011
Discounting factor is applied on the number of years you hold the bond.
Gaurav
(student)
(89 Points)
Replied 08 December 2011
Even i am not sure about the applicablity of concept of Duration.
I think Duration means the time taken by internal cash flows of an investment to equal its investment value.
I have he following query.
The Investment portfolio of a bank is as follows:
Government Bond, Coupon Rate, Purchase rate,Duration (Years)
(F.V.100 per Bond)
G.O.I. 2006 11.68 106.50 3.50
G.O.I. 2010 7.55 105.00 6.50
G.O.I. 2015 7.38 105.00 7.50
G.O.I. 2022 8.35 110.00 8.75
G.O.I. 2032 7.95 101.00 13.00
Face value of total Investment is5 crores in each Government Bond.
Calculate actual Investment in portfolio.
What is a suitable action to churn out investment portfolio in the following scenario?
1. Interest rates are expected to lower by 25 basis points.
2. Interest rates are expected to raise by 75 basis points.
Also calculate the revised duration of investment portfolio in each scenario.
Can anybody please provide the solution to this question??
And please explain on what basis is the decision being made?? And the relevance of Duration conceptually and in decision making in this problem??
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