4. Bond Portfolio Duration
f. calculate the duration of a portfolio and explain the limitations of portfolio duration;
What are the two ways to calculate the value of a bond portfolio?
- The weighted average of the time to receipt of aggregate cash flows. This method is based on the cash flow yield, which is the internal rate of return on the aggregate cash flows.
- The weighted average of the durations of individual bonds that compose the portfolio. The weight is the proportion of the portfolio that a bond comprises.