Duration & Immunization Dr. Lokanandha Reddy Irala (www.irala.org) 1.

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Presentation transcript:

Duration & Immunization Dr. Lokanandha Reddy Irala ( 1

Apply Your Knowledge  Of A & B which do you choose? And why? BOND FV COUPON (%) TTMRVCMP A B  Other things being same, the one with the higher coupon is more attractive Dr. Irala 2 Bonds

Applying Knowledge  Of C & D which do you choose? And why? BOND FV COUPON (%) TTMRVCMP C D  If two bonds have the same coupon rate, Par value and yield then the one with the shorter life will sell at a smaller discount / premium Dr. Irala 3 Bonds

Apply your Knowledge!!!  Of E & F which do you choose? And why? BOND FV COUPON (%) TTMRVCMP E F  Find the Yield Dr. Irala 4 Bonds

Apply your Knowledge!!!  Of E & F which do you choose? And why? BOND FV COUPON (%) TTMRVCMPYTM E % F %  Prefer F to E Dr. Irala 5 Bonds

Apply your Knowledge!!!  Of G & H which do you choose? And why? BONDCMPFV COUPO N TTMRV G1, H1, Dr. Irala 6 Bonds

Apply your Knowledge!!!  Of G & H which do you choose? And why? BONDCMPFV COUPO N TTMRVYTM G1, H1,  Both have the same return  What about Risk?  The percentage change in a bond’s price owing to a change in its yield will be smaller if the coupon rate is higher Dr. Irala 7 Bonds

Apply your Knowledge!!!  Of I & J which do you choose? And why? BONDFV COUPO NTTMRVYTMCMP I ,034 J ,034 Dr. Irala 8 Bonds

Apply your Knowledge!!!  Of I & J which do you choose? And why? BONDFV COUPO NTTMRVYTMCMP DURAT ION I , J , Dr. Irala 9 Bonds

Computing Duration  CMP *(66.03/1034)= *(62.29/1034)= *(58.77/1034)= *(847.54/1034)= CMP Duration BONDFVCOUPONTTMRVYTMCMPDUR I , Dr. Irala 10 Bonds

Duration Defined  Weighted average number of years necessary to recover the initial cost of the bond, where the weights reflect the time value of money

Understanding Duration  Of two bonds K & L which do you choose? And why? K (5,597) L (5,597)

Dr. Irala 13 Bonds

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