Duration doesn’t mean time to maturity. It’s a measure of bond sensitivity to interest rates. Higher duration = more sensitivity. It’s measured in years tho which is confusing. You can make your 162% in one year if the interest rates move as the authors say, which is pretty mouth-watering!
(edit: just to showcase the degree of difference, a bond with 40 years to maturity can have duration of just 10 years if the bond’s coupon value is 10% & market rates were also 10% at the time of isssuance. This means the value of the bond will change less with rising rates. A 40-year bond with a 1% coupon, issued when market rates were also 1% will have duration of around 33 years, which in plain English just means that if interest rates go up a lot you get “FTX-linked tokens in November” returns. Bonds are tricky things and their pricing is weird is especially in ZIRP environments)
Yep, makes sense. I adjusted my calculations to be about 10 years, to more directly reflect the post, which doesn’t seem to change much.
Agree that if all the other details checked out, and you had 1-2 year timelines, this might imply a higher expected return, but I don’t currently see why it would imply that the markets decisively reject 10 year timelines, even if you buy the rest of the model (which I also have a bunch of other critiques of).
Duration doesn’t mean time to maturity. It’s a measure of bond sensitivity to interest rates. Higher duration = more sensitivity. It’s measured in years tho which is confusing. You can make your 162% in one year if the interest rates move as the authors say, which is pretty mouth-watering!
(edit: just to showcase the degree of difference, a bond with 40 years to maturity can have duration of just 10 years if the bond’s coupon value is 10% & market rates were also 10% at the time of isssuance. This means the value of the bond will change less with rising rates. A 40-year bond with a 1% coupon, issued when market rates were also 1% will have duration of around 33 years, which in plain English just means that if interest rates go up a lot you get “FTX-linked tokens in November” returns. Bonds are tricky things and their pricing is weird is especially in ZIRP environments)
Yep, makes sense. I adjusted my calculations to be about 10 years, to more directly reflect the post, which doesn’t seem to change much.
Agree that if all the other details checked out, and you had 1-2 year timelines, this might imply a higher expected return, but I don’t currently see why it would imply that the markets decisively reject 10 year timelines, even if you buy the rest of the model (which I also have a bunch of other critiques of).