Dollar Duration

Dollar duration is a measure of the sensitivity of a security's price to changes in interest rates. It is calculated by multiplying the security's price by the change in its price for a given change in interest rates.

For example, if a security's price is $100 and it decreases by $1 for a 1% increase in interest rates, then its dollar duration is $10.

Dollar duration is often used to compare the interest rate sensitivity of different securities. Securities with a higher dollar duration are more sensitive to interest rate changes than securities with a lower dollar duration.

Dollar duration can also be used to calculate the duration of a portfolio of securities. The duration of a portfolio is the weighted average of the durations of the individual securities in the portfolio.

Dollar duration is a useful tool for investors who want to manage the interest rate risk of their portfolios. By understanding the dollar duration of their investments, investors can make informed decisions about how to allocate their assets to minimize their risk.

In addition to dollar duration, there are other measures of interest rate sensitivity that investors may use. These include modified duration, effective duration, and convexity. Each of these measures has its own advantages and disadvantages, and investors should choose the one that is most appropriate for their needs.

Dollar duration is a valuable tool for investors who want to manage the interest rate risk of their portfolios. By understanding the dollar duration of their investments, investors can make informed decisions about how to allocate their assets to minimize their risk.