A SIMPLE MEASURE OF DURATION OF DEFAULT RISK-FREE COUPON BONDS

Abstract

Investments in fixed-income default risk-free coupon bonds are not free from systematic risks arising out of fluctuations in the rate of interest and inflation. Possible fluctuation in the rate of return arising from fluctuations in the rate of interest is known as interest rate risk. Interest rate risk has two components viz., price risk and reinvestment rate risk. When price falls due to increase in interest rate, there is gain from reinvestment of intermediate cash inflows and vice versa. So, change in the interest rate has opposite effects on price and reinvestment of intermediate cash inflows. So, there may exist a point of time at which these effects may off-set each other. This break-even point of time is known as duration. This paper finds a measure of duration which is very easy to calculate yet gives an accurate result