What is Bond Duration ? and, How it can be used to rank a bond ?

Duration is a weighted average of the maturity of all the income streams from a bond or portfolio of bonds.

For Ranking issue we should analyze each issuer’s financial position and an assign letter grade will ranks their likelihood of successfully repaying the debts incurred.

The basic ranking system is as follows (each ranking system is a little different, but this should be a useful general guide):

• AAA - Highest quality, with the least likelihood of default.
• AA – High likelihood of repayment; together with AAA bonds these are considered “high grade bonds.”
• A – Quite safe, thought to be a good medium-grade bond. There is some risk if conditions become quite difficult.
• BAA or BBB – Somewhere in the middle, they aren’t extremely safe, but they are not a great risk either. Anything with BAA or higher is called an “investment grade bond.”
• BA or BB – The future of this issuer is somewhat in doubt. Bonds at or below this ranking are called “speculative.”
• B – These bonds are fairly speculative. Significant risk of default if conditions become difficult.
• CAA or CCC – These bonds are highly speculative. Bonds with this ranking or lower are considered junk bonds.
• CA or CC – Significant risk of default, highly speculative.
• C – In some rankings this is just another grade of junk bonds, others use it to mean that these bonds are no longer paying interest or are in default already.
• D – Bonds that have been defaulted on.
• N - Not rated, usually because the company did not want the issue to be rated or because the company is too new to have a credit history to base a rating on.

Bond duration is the weighted average of the times the cash flows are received. It is also the price sensitivity of a bond to the yeild.