- 1). Determine the coupon structure of each bond in the portfolio: the coupon rate, face value, coupon payment dates and the maturity date of each bond. Such information can be obtained most easily from the prospectus of each bond. A prospectus is a legal description of the bondholder's rights and responsibilities and is issued with every new bond. A copy of the prospectus can be obtained from the bond's issuer.
- 2). Enter the bond details you found in Step 1 into the online Bond Duration Calculator (see Resources). While you can manually calculate the bond duration by using the formula provided in the link, the operation is time consuming. Especially if your portfolio contains a large number of individual bonds, manual calculation of each bond's duration will be rather tedious.
- 3). Divide the market value of each bond by the total value of the portfolio. The result will provide you with the relative weight of each bond. If you have two bonds whose market values are $200,000 and $300,000 respectively, the total value of the portfolio equals $500,000. The relative weight of the first bond equals $200,000/$500,000 while the weight of the second bond is $300,000/$500,000. Therefore, the weights for the bonds are 0.4 and 0.6 respectively.
- 4). Multiply the duration of each bond by its weight and add all the results. Assume that the durations of the two bonds in the prior example were 2 and 3 respectively. The duration of the portfolio equals 2*0.4 + 3*0.6 = 2.6. This is a measure of how much the total value of the portfolio will decrease if the interest rate of each bond declines by 1 percent.
SHARE
