Credit quality and duration together describe a bond style. It is important to understand these metrics, as they represent the two most important risk factors for bonds.
Duration measures the sensitivity to changes in interest rates. It estimates the percentage change in value of the bond if interest rates increase or decrease by 1%. For example, a bond with a duration value of 5 is expected to loose 5% in value if the interest rates increase by 1%. Similarly it is expected to gain 5% in value if interest rates decrease by 1%. There exists several formulas for duration. Kwanti uses effective duration, because it gives the most accurate estimate. For ETFs, mutual funds and closed-end funds, the average duration of the fund's bond holdings may be calculated.
Credit quality indicates the probability of default. It is assigned by a rating agency. Kwanti uses ratings provided by Morningstar, from AAA (highest quality) to B (lowest quality). High credit quality is desirable and implies that there is a very small chance of default. Low credit quality implies a high risk of default. For ETFs, mutual funds and closed-end funds, the average credit quality of the fund's bond holdings may be calculated.
|AAA||Extremely low default risk||High quality|
|AA||Very low default risk|
|A||Low default risk||Medium quality|
|BBB||Moderate default risk|
|BB||Above average default risk||Low quality|
|B||High default risk|
|Below B||Very high default risk|