In bond trading, what does duration refer to?

In bond trading, what does duration refer to?

• A. The risk associated with changes in interest rates
• B. The seller's inventory of bonds
• C. The period until maturity of the bond
• D. The amount of coupon payments received

Answer: (A)

Duration is a key concept in bond trading and refers to a measure of the sensitivity of a bond's price to changes in interest rates. Specifically, it helps investors understand how much the price of a bond is expected to fluctuate given a change in interest rates. The longer the duration, the more sensitive the bond is to interest rate movements. This is crucial for managing interest rate risk, as it allows investors to assess potential price volatility based on market shifts. Though the other options touch on aspects of bond trading, they do not encapsulate the specific meaning of duration. For instance, the period until maturity refers to the time left before the bond is repaid, and the amount of coupon payments received focuses on income generation rather than price sensitivity. While the seller's inventory of bonds may relate to trading strategies, it does not define the concept of duration. Understanding duration aids traders and investors in making informed decisions about risk management and portfolio duration exposure.

Duration is a key concept in bond trading and refers to a measure of the sensitivity of a bond's price to changes in interest rates. Specifically, it helps investors understand how much the price of a bond is expected to fluctuate given a change in interest rates. The longer the duration, the more sensitive the bond is to interest rate movements. This is crucial for managing interest rate risk, as it allows investors to assess potential price volatility based on market shifts.

Though the other options touch on aspects of bond trading, they do not encapsulate the specific meaning of duration. For instance, the period until maturity refers to the time left before the bond is repaid, and the amount of coupon payments received focuses on income generation rather than price sensitivity. While the seller's inventory of bonds may relate to trading strategies, it does not define the concept of duration. Understanding duration aids traders and investors in making informed decisions about risk management and portfolio duration exposure.