Question

Identify what is the Economic meaning of this Duration and explain in one paragraph what is its usefulness for investors?

Answer 1

Duration is the measure of sensitivity of the price of Bond or other debt instrument to changes in the interest rates in the economy so it can be said in economic context that duration is a direct measure of interest rate sensitivity or elasticity of an asset or liability.Hence, duration can be said to be elasticity of an asset which will be sensitive to the price of that asset or liability and they will be reflecting the changes or shocks in the interest rate. it is useful for the investor because it will be helping the investor in order to gain an idea about the changes in the the reaction of the market participants to the changes in the interest rate and it will help the market participants to determine the change in the demand due to change in the interest rate because the interest rate will be impacting the demanded quantity to a large level and hence it will be leading to determining the elasticity of the demand of an asset.