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Duration Based Approach

In: Business and Management

Submitted By Rudranidas
Words 2022
Pages 9
INVESTMENTS: DURATION BASED APPROACH
Introduction:
Duration Based Approach in investment depends on the investment goals and time frames, the amount of risks that can be taken and the income and tax structure. Investments on the basis of duration could be classified as: Short-Term, Medium Term or Long Term . * Short Term Investment: Investments made by an individual or organisation that will expire within one year. Commonly, these accounts contain stocks and bonds that are considered highly liquid assets. Example- Investing money for going in a vacation within a year, investing in company’s yearly inventories. * Medium term: An intermediate duration asset holding period or investment horizon. The exact time period to be considered as medium term depends on the investor's personal choices, as well as on the asset class under consideration. Bonds that have a maturity period of between 5 to 10 years are considered to be intermediate -term bonds In the fixed-income market. Example – Investing money for buying a house in 5 years, investing in machineries which will last for 5 years. * Long Term Investments: The account on the asset side of the balance sheet of any company which represents the investments that the company intends to hold for more than ten year. It includes real estate, stocks, bonds and cash. Example – Investing money in retirement scheme benefits, investing in long term assets of factories.
Measurement of duration: * Effective duration can be defined as the percentage change in security’s price that results from a change in yield of 100 basis points. e.g. - The price of a bond with an effective duration of 2 years will rise 2% for every 1% decrease in the yield. Similarly the price of a bond with duration of 5 years will rise 5% for a 1% decrease in the yield. As interest rates and bond yields are directly correlated, the longer the...

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