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## New answers tagged duration

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Suppose the short rate $r$ follows the diffusive process $$dr=\mu dt+\sigma dB$$ where $B$ is the standard Brownian motion. The price of a bond portfolio $P(r,t,T)$ at time $t$ maturing at time $T$ follows dP=\frac{\partial P}{\partial t} dt+\frac{\partial P}{\partial r}dr+\frac12\frac{\partial^2 P}{\partial r^2}dr^2=\Big(\frac{\partial P}{\partial t}+ ...

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I agree with the assertion in the OP. If two bonds are identical then the interest rate sensitivity of the one with higher credit risk is lower. That's because the expected cash flows are smaller due to credit risk.

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If you have a 0 coupon junk bond with the same time to maturity as a investment grade bond that pays coupons, the junk bond will have higher duration and visa versa. Calling it a junk or an ig bond doesn't change the duration, the formula is still the same so you can't say a ig bond always has a larger or smaller duration.

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Duration is technically independent of credit risk. ANY bond's duration is just a matter of coupon, price, discount rate. However, many issued high yield bond ARE typically shorter, because of a. high coupon (all else equal makes duration shorter) b. they can't issue too long: they themselves don't want to finance expensively, and investors don't want to ...

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