Investment Improvement: Adding Duration to the Toolbox

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Investment Improvement: Adding Duration to the Toolbox

"Investment Improvement: Adding Duration to the Toolbox" by Michelle Clark Neely discusses several types of risks bond investors face and the use of duration for assessing risk and measuring a bond's price sensitivity to interest rate changes. This reading augments Chapter 4's coverage of the relation between bond prices and interest rates and the distinction between yield and rate of return on a bond.

Define and compare default risk, interest rate risk, market risk, and reinvestment risk.
How do market risk and reinvestment risk affect an investor when interest rates fall?
During a period of falling interest rates, would you prefer to be holding a 15-year coupon bond or a 15-year zero-coupon bond? Explain why using the duration concept.

Source: "Investment Improvement: Adding Duration to the Toolbox." Michelle Clark Neely, Federal Reserve Bank of St. Louis The Regional Economist, April 1996, pp. 10-11.

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