MSFT) Excel. If you know the coupon, yield, price, settlement date and maturity date, the duration function in Excel can calculate the number. Otherwise, you need to recalculate the price of the bond with identical 100 bps increases and decreases in the yield.
After the price changes are calculated, the following formula will result in the bond's duration: (Price for a negative 100 bps yield change - Price for a positive 100 bps yield change) / (2 X .01 X Current Price) At its most basic level, duration will show that securities like a 10-year Treasury note with a duration of 8.29 will expose an investor to more interest rate risk than a 2-year Treasury note with a duration of 1.91. As a result, if an investor expects interest rates to increase, he would be better off in the 2-year note, since it will suffer a smaller price decline than the 10-year note. But if he expects interest rates to decrease, he ought to buy the 10-year note. Digging deeper into duration, investors can use the metric to mitigate risk exposure. An investor looking for a high-quality corporate issue with a long time horizon and little price volatility may consider General Electric's 3 1/8 December 2019 bond as well as Exxon's 8 5/8 August 2021 bond as possible investments. Despite having a longer time to maturity, Exxon's bond has a shorter duration than GE's, meaning that investing in Exxon's bond would actually lead to less price volatility. There are several drawbacks to duration. The measure assumes a parallel shift in the yield curve, which isn't usually what happens in the real world. Twists are far more common, so the duration measure isn't usually accurate. Also, duration is only descriptive for small shifts in the yield curve. As the price of a bond rises and falls, duration will also change. As a result, duration will have to be recalculated after yield-curve shifts and won't be descriptive for large changes.
-- Reported by David MacDougall in Boston.