What does Duration Analysis measure in the context of bonds?

Duration analysis is a key concept in bond investing that measures the sensitivity of a bond's market value to changes in interest rates. It calculates the weighted average time it takes to receive all cash flows from a bond, reflecting both the timing and size of those cash flows. This is significant because when interest rates change, the present value of future cash flows is also affected, which can lead to fluctuations in the bond's price.

By focusing on the sensitivity to interest rate movements, duration analysis helps investors understand how bond prices are likely to react to shifts in interest rates, allowing them to make more informed investment decisions or manage interest rate risk. A bond with a longer duration will typically experience greater price changes with interest rate fluctuations compared to a bond with a shorter duration.

The other options do not encapsulate the essence of duration analysis. For instance, measuring the risk of default pertains to credit risk assessment, which is different from interest rate risk. Yield spreads are useful for comparing different bonds but do not relate to duration. Lastly, while the duration of interest payments is part of the broader concept, duration analysis specifically focuses on how these payments affect market value with respect to interest rate changes.