Maximum Duration of Below Par Bonds: A Closed-Form Formula

8 Pages Posted: 6 Jun 2005

See all articles by Paolo Pianca

Paolo Pianca

Ca Foscari University of Venice - Dipartimento di Economia

Date Written: June 6, 2005

Abstract

The nature of the relationship between bond's duration and its term to maturity is somewhat complex and contrary to what our intuition would suggest, there is not always a direct relationship between duration and maturity, in the sense that an increase in maturity does not necessarily entail an increase in duration.

For bonds selling below par, an increase in maturity has the following effects: duration first increases, it reaches a maximum and then decreases. For this maximum we provide an explicit formula based on the Lambert W function.

Keywords: Macauley's duration, closed form formula, below par bonds, Lambert's W function

JEL Classification: C41

Suggested Citation

Pianca, Paolo, Maximum Duration of Below Par Bonds: A Closed-Form Formula (June 6, 2005). Available at SSRN: https://ssrn.com/abstract=738445 or http://dx.doi.org/10.2139/ssrn.738445

Paolo Pianca (Contact Author)

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy
+390412346915 (Phone)
+390415221756 (Fax)

HOME PAGE: www.dma.unive.it/~pianca

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