The AI (ChatGPT) Bond Investing Handbook: Bond Duration Risk
Here is the response from ChatGPT for the prompt bond duration risk 200 words entered on February 14, 2023.
Bond duration risk refers to the potential impact of changes in interest rates on the value of a bond. Duration is a measure of a bond's sensitivity to changes in interest rates, and it is expressed in terms of years. The higher the duration, the more sensitive the bond's price will be to changes in interest rates.
When interest rates rise, the value of existing bonds decreases because their fixed interest payments become less attractive compared to new bonds issued at the higher rate. This means that bonds with longer durations will experience greater price declines than those with shorter durations.
Similarly, when interest rates fall, the value of existing bonds increases because their fixed interest payments become more attractive compared to new bonds issued at the lower rate. In this case, bonds with longer durations will experience greater price increases than those with shorter durations.
Investors can manage duration risk by adjusting their portfolio's bond allocation and choosing bonds with shorter durations, which are less sensitive to interest rate changes. Alternatively, they can use financial instruments such as interest rate swaps or options to hedge against changes in interest rates.
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