Primer on duration and convexity (Bank of America Merrill Lynch) (18 pages)

(Hope it is useful for the professional exams)

Table of Contents
Overview                                                                         2
The essentials                                                                3
Duration                                                                           4
Convexity                                                                         7
Duration & convexity in your investment decisions 10
Appendix                                                                         14

(excerpt)
Duration and convexity in your investment decisions

Using duration
Calculating the duration of a bond portfolio

It is a small step to go from the duration of an individual security to the duration of
a bond portfolio. Doing so is useful for investors because price risk should be
viewed in the context of the whole portfolio, rather than just an individual security.

The duration of a portfolio is simply the duration of the individual securities
weighted by the share of the total market value of the portfolio that each security
represents. Table 3 gives an example. We multiply each security’s share of the
portfolio (Column 2) by the duration of that security (Column 3). The sum of the
weighted duration figures (the bottom of column 4) is the duration of the portfolio.

In this example, the duration of the portfolio is 6.75. That means that a 1% rise
(decline) in the yield on each of the securities in the portfolio would reduce (raise)
the value of the portfolio by about 6.75%. Note that the portfolio duration statistic
applies only if the yield on each of the securities changes by the same amount.