One of the several factors to be considered while investing in bonds is the duration of the bond. In general sense, duration might mean only the tenure or time period. However, in bond investing, duration includes not the time factor but also the interest rate risk attached with it. There are different ways of computing duration and each measure has a different interpretation. Generally, these details are given by brokers or financial advisors who provide the pricing details of the bonds. In this article, we will elaborate on how to consider duration while investing in bonds.

Duration is a measure of interest rate risk. It describes the sensitivity of the bond price to the changes in the interest rate. Based on the current economic environment and the expected change in interest rate environment, investors can use duration as tool for investing in bonds in order to optimise their returns. Generally, portfolio managers construct bond portfolios with a target duration based on their expectation of the interest rate movement and the risk appetite of the investors. While working on their individual portfolios, even retail investors can apply similar strategy.

When the markets are normal with minimal change expected in the interest rates investors could opt to hold short or low duration bonds. Bonds with low duration of one to three years are less volatile and despite moderately low yields, these bonds earn relatively higher return for shorter duration. Similarly, bonds with duration of three to five years are more volatile, but earn higher yields. Long duration strategy typically involves investing in bonds with duration ranging from six to thirty years. Perpetual bonds are also long duration bonds as they are generally callable after 15 years. Long duration bonds might be used to match the liabilities portfolio. This ensures smooth cash flows between the maturity of the assets and liabilities. Investors might also look at long duration bonds as an alternative to equity investments. Long duration bonds are more stable than equities and also promise an exit point for the investors.

While working out different duration portfolios it is important for the investors to understand that the overall returns of the portfolio might not be same as the returns earned on similar duration bond. The investors can utilise this to their advantage and dilute the interest rate risks by diversifying their portfolio with bonds of different duration. Though the returns vary the interest rate risk is mitigated.

Investors can seek the help of professional financial advisors like C.L. King & Associates to help them construct a portfolio that matches the interest risk with risk appetite of the investors. Even retail investors invested in bond funds could ask their brokers to share the information on the duration of the fund and kept themselves aware of the inherent interest risk of the funds.

C.L. King & Associates takes a rigorous approach to financial advisory and M&A assignments based on years of experience. In addition to valuation, our team provides financial and strategic analysis to identify key transaction partners and the right deal structure. C.L. King has acted as Co-Manager for PECO Energy Company, Charter Communications, Amazon and many more for Bond Offering.
For more details, please visit us here: http://www.clking.com/