An Improved Approach to Calculate the Yield and Duration of a Bond Portfolio

Journal of Applied Finance, Vol. 12, No. 2, Fall/Winter 2002

Posted: 7 Jan 2003

See all articles by Youngsoo Choi

Youngsoo Choi

Hankuk University of Foreign Studies

Jinwoo Park

Hankuk University of Foreign Studies

Abstract

This paper presents a new methodology to approximate the yield and duration of a bond portfolio. We demonstrate that the duration-weighted average yield consistently underestimates the exact yield on a bond portfolio having positive convexity. By considering the convexity, we present a new approximation formula for calculating the bond portfolio yield that can significantly reduce approximation errors. In addition, we find the value-weighted portfolio duration causes approximation errors that are systematically associated with the difference in bond maturities. A new approximation formula that takes convexity into account substantially reduces duration approximation errors.

JEL Classification: G10

Suggested Citation

Choi, Youngsoo and Park, Jinwoo, An Improved Approach to Calculate the Yield and Duration of a Bond Portfolio. Journal of Applied Finance, Vol. 12, No. 2, Fall/Winter 2002, Available at SSRN: https://ssrn.com/abstract=360383

Youngsoo Choi (Contact Author)

Hankuk University of Foreign Studies ( email )

Department of Mathematics
Mohyeon-myon, Yongin-shi
Kyunki-do 449
Korea

Jinwoo Park

Hankuk University of Foreign Studies ( email )

Department of Fianance
270 Imun-dong Dongdaemun-gu
Seoul, 130-791
Korea

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