1. Duration MGT 4850 Spring 2009 University of Lethbridge

2. Interest Rate Term Structure http://www.smartmoney.com/onebond/index.cfm?story=yieldcurve

3. Bootstraping and Forward rates Non-arbitrage in Interest rate futures Trading the Yield curve Trading Spreads

4. The NOB Spread The NOB spread is “notes over bonds” Traders who use NOB spreads are speculating on shifts in the yield curve –If you feel the gap between long-term rates and short-term rates is going to narrow ( yield curve slope decreases or flattens), you could sell T-note futures contracts and buy T-bond futures

5. NOB spread (trading the yield curve) slope increases (long term R increases more than short term or short term even decreases) buy notes sell bonds

6. TED spread (different yield curves) The TED spread is the difference between the price of the U.S. T-bill futures contract and the eurodollar futures contract, where both futures contracts have the same delivery month (T-bill yield<ED yield) –If you think the spread will widen, buy the spread (buy T-bill, sell ED)

7. Trading Spreads

8. Definition Measure of the sensitivity of the price of a bond to changes in the interest rate at which bond is discounted Macauley duration measure Basic Duration Calculation

9. Using Excel Formula Settlement (purchase date) Maturity (bond’s maturity date) Coupon Yield (to maturity) Frequency (# coupons per year) Basis (day count) 0 30/360 1 act/actual 2 act/360 3 act/365 4 Eur 30/360

10. Meaning of Duration Weighted Average of the bond’s payments Bond’s price elasticity with respect to its discount rate Discount factor elasticity Price volatility

11. Babcock’s Formula Weighted average of “current yield” and PVIF

12. Duration Patterns Maturity

13. Duration Patterns Coupon