Question

What are the limitations of using duration as a measure of a bond’s price sensitivity to interest-rate change

Answer 1

Bond duration is the measuring bond interest rate risk that consider a bond yield,maturity and other features.The limitations of using duration as a measure of a bond’s price sensitivity to interest-rate change are below,

• In duration of bond small changes in the return that is yield,the estimated slop don't capture bond convexity.
• Bonds are not option free so bond duration equation not correctly working.
• Bond duration formula assumptions lead to bond portfolio made bonds different maturity and credits, so changes in the rate may not be for all bonds maturity and credits.
• Changes in the yiled lead to changes in the expected cash flow of bond.so the bond duration is not accurate.