Economy
Measuring a Bond's Interest-Rate Sensitivity
In addition, because every mortgage payment a homeowner makes is part interest, part principal, mortgage investors receive payments that are part interest, part principal.
The average life of a mortgage-backed security is the amount of time it takes for the weighted average of principal payments to come back to the investor, assuming a certain rate of prepayments. A pool of 30-year mortgages can have an average life ranging from less than five years to more than 20, depending on how fast a rate of prepayments is assumed. Neither effective duration nor average life tells you exactly how much a security's price will change as its interest rate changes for the simple reason that that is not knowable. But effective duration is the best tool that's been developed so far for comparing the interest-rate sensitivity of callable securities to noncallable ones.RELATED STORIES:
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| Dow Jones | S&P 500 | NASDAQ | 10-Year Note |
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| 12,454.83 | 1,317.82 | 2,837.53 | 17.45 |
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