Practical Uses of Duration and Convexity for Bond Buyers

In this third and final installment of Fixed-Income Forum's miniseries on duration and convexity, we discuss basic practical uses of the two concepts for the individual investor.

First, let's talk about buyers of individual bonds.

If you're buying an individual bond or assembling a portfolio of them, the duration of the individual securities and of the entire portfolio should at least be of interest to you, since it gives you an approximate idea of their sensitivity to changes in interest rates. Remember, a bond or a portfolio with a duration of five years will go down in price by approximately 5% in the event its yield rises by 100 basis points (and rise by approximately 5% if the yield falls by that amount). ...