Duration is i of the favourite query of an interviewer.
Sensitivity inwards your portfolio value amongst honor to changes inwards your involvement charge per unit of measurement is called every bit Duration.
For ex: If i tell that Duration of my portfolio is 5, as well as then it agency if i decrease 1% involvement charge per unit of measurement as well as then at that topographic point volition endure 5% increment inwards my portfolio value.
Now you lot volition recall how tin you lot tell whether portfolio value volition increment or decrease
Ans: Simple signal is that your portfolio value is the discounted value of your futurity cashflows.
X = y/(1+i)
hence if you lot decrease your involvement charge per unit of measurement inwards this equation as well as then the value of X volition increase. Isn’t it?
Application Use: An actuary volition desire to know how much volatile his portfolio is due to involvement charge per unit of measurement because he has to fit those assets amongst the liabilities. Assets as well as Liabilities are both acquaint value of futurity cashflows inwards an insurance fellowship piece doing actuarial valuation. So it tin endure possible that decrease inwards your involvement charge per unit of measurement may leads to to a greater extent than increment inwards your liabilities than your assets as well as and then it volition endure a problem.
Just because of this immunisation concept into mass which says that
1. Present Value of assets = Present value of Liabilities
2. Duration of Assets = Duration of Liabilities
There is i to a greater extent than status though exactly nosotros volition verbalise over that inwards upcoming articles.