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On the computation of a formula for the duration of a bond that yields precise results
journal contributionposted on 2023-06-07, 19:31 authored by Mike Osborne
In fixed income analysis it is known that the various measures of interest rate sensitivity (duration) yield approximate results. Even with the addition of concepts like convexity, the results remain approximations. This paper summarizes a new approach based on the fact that the time value of money equation is a polynomial, and a polynomial has more than one root. The result of taking the multiple roots into account is a solution to the problem of inaccuracy. A new equation for duration is given that provides precise results. The paper contains a summary of previous work, describes the computational issues presented by the new approach, and suggests ways to deal with them.
JournalQuarterly Review of Economics and Finance
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- Business and Management Publications
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