DURATION (Chapter 25) Duration is a measure of the sensitivity of the price of a bond to changes in the interest rate Risk measure. Consider a bond with.

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Presentation transcript:

DURATION (Chapter 25) Duration is a measure of the sensitivity of the price of a bond to changes in the interest rate Risk measure. Consider a bond with payments Ci: the first n-1 are interest payments, the last one is the last interest payment + repayment of the principal Macauley Duration (flat term structure)

DURATION DURATION(settlement; maturity; coupon; yield; frequency; basis) Important: For the dates, use the function DATE(year; month; day) Settlement: purchase date. maturity maturity of the bond. coupon nominal interest rate for the coupon. Yield (annual basis) Frequency (number of coupon payments per year) Basis (day count basis, default 30/360)

DATES: Are serial numbers 1 January 1900 / 1 January 1904

Modified duration:

Modified duration: Elasticity of the price to the interest rate: Volatility of the price:

MDURATION MDURATION(settlement; maturity; coupon; yield; frequency; basis) Duration/(1+r)

Immunization strategies If a portfolio has the same payoff at some specific future date no matter what interest rate structure prevail, then it is said to be immunized. Present value of the obligations: V0 Present value of the assets: VB

Immunization strategies If the duration of the asset equals the duration of the obligation. An obligation against which an asset of that type is held is said to be immunized Immunization applies only to a first order approximation