Derivatives Foundation interview preparation

Questions

100

Traced to a firm

29

Firms

19

Updated

September 2026

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All firmsMSMorgan Stanley4Nomura4Akuna Capital2Amundi2HSBC2PIMCO2Bank of America1Barclays1Citadel1DRW1Goldman Sachs1Jane Street1Millennium Management1Mizuho1Old Mission Capital1RCRBC Capital Markets1Scotiabank1UBS1Wells Fargo Securities1

Topic

All topicsForwards and futures10Options basics8Option pricing7The Greeks10Volatility7Option strategies9Swaps and rates7Credit derivatives4Market structure and clearing6Indian derivatives8Trading and markets9Brainteasers6Fit9

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Type

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1. 054How does duration affect interest rate risk?Swaps and ratesIntermediatetechnicalPIMCODebt Capital Markets · San Diego · 2026

   Say this

   Duration is the sensitivity of a bond's price to a change in yield, in years. A duration of 7 means a 100 basis point rise in yields costs you roughly 7 percent of value. So duration is not a description of the bond's maturity — it is the size of your interest rate exposure, and it is what you hedge.

   Then walk it

   1. Macaulay duration is the weighted average time to receipt of the cash flows. Modified duration divides that by one plus the yield, and it is the number you use for price sensitivity.
   2. The working formula: percentage price change is approximately minus modified duration times the yield change. Add convexity for large moves — plus a half times convexity times the yield change squared — because the price-yield relationship is curved, not linear.
   3. Convexity is your friend as a bondholder: it means you lose less on a rate rise than duration alone predicts and gain more on a fall. Which is also why convexity costs something in the price.
   4. The drivers: longer maturity, lower coupon and lower yield all raise duration. A zero-coupon bond's duration equals its maturity, which is the cleanest case and the reason zeros are the sharpest rate instrument.
   5. How it gets used: dollar duration, meaning duration times market value, is what you actually hedge. If a 500 million portfolio has duration 7, its dollar duration is 35 million per 100 basis points, and you short enough bond futures or pay fixed on enough swap notional to offset it.
   6. The limitation to volunteer: duration assumes a parallel shift in the curve. Real curves steepen, flatten and twist, so a duration-matched portfolio can still lose money on a curve move. That is why desks look at key rate durations bucketed along the curve rather than one number. And for callable or mortgage-backed bonds, duration itself changes with yields — negative convexity — so the static number misleads exactly when you need it.

   Where candidates lose it

   Defining duration as average time to cash flows and stopping. The question asks about risk, so lead with the sensitivity reading and the dollar duration hedge. And name the parallel-shift assumption — a bond manager will expect key rate durations to come up.

   Expect next

   • What does convexity add?
   • How would you hedge the duration of a 500 million portfolio?
   • Where does duration break down as a risk measure?

   Reported by candidates at PIMCO (Debt Capital Markets, San Diego, 2026). Source: Wall Street Oasis.

Firm tags come from public, anonymous candidate reports on Wall Street Oasis: strong signal, not sworn testimony. Firms are named as the places a question was reported, not as partners of Fin Maverick. Answers are written for this page to show how to think out loud; they are not scripts to recite.