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

2. Apply Your Knowledge  Of A & B which do you choose? And why? BOND FV COUPON (%) TTMRVCMP A 10000.0651000883.31 B 10000.0751000883.31  Other things being same, the one with the higher coupon is more attractive Dr. Irala 2 Bonds

3. Applying Knowledge  Of C & D which do you choose? And why? BOND FV COUPON (%) TTMRVCMP C 10000.0651000883.31 D 10000.0631000924.06  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

4. Apply your Knowledge!!!  Of E & F which do you choose? And why? BOND FV COUPON (%) TTMRVCMP E 10000.0661000843.32 F 10000.0751000883.31  Find the Yield Dr. Irala 4 Bonds

5. Apply your Knowledge!!!  Of E & F which do you choose? And why? BOND FV COUPON (%) TTMRVCMPYTM E 10000.0661000843.32 9.55% F 10000.0751000883.31 10.08%  Prefer F to E Dr. Irala 5 Bonds

6. Apply your Knowledge!!!  Of G & H which do you choose? And why? BONDCMPFV COUPO N TTMRV G1,034.6510000.0741000 H1,034.4610000.0441131 Dr. Irala 6 Bonds

7. Apply your Knowledge!!!  Of G & H which do you choose? And why? BONDCMPFV COUPO N TTMRVYTM G1,034.6510000.07410000.06 H1,034.4610000.04411310.06  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

8. Apply your Knowledge!!!  Of I & J which do you choose? And why? BONDFV COUPO NTTMRVYTMCMP I10000.07410000.061,034 J10000.04311050.061,034 Dr. Irala 8 Bonds

9. Apply your Knowledge!!!  Of I & J which do you choose? And why? BONDFV COUPO NTTMRVYTMCMP DURAT ION I10000.07410000.061,0343.6 J10000.04311050.061,0342.8 Dr. Irala 9 Bonds

10. Computing Duration  CMP EOYCFPVIF@YTMPVCF? 1700.943366.031*(66.03/1034)=0.0638 2700.889962.292*(62.29/1034)=0.1204 3700.839658.773*(58.77/1034)=0.1704 410700.7920847.544*(847.54/1034)=3.2766 1034.65 3.63 CMP Duration BONDFVCOUPONTTMRVYTMCMPDUR I10000.07410000.061,0343.6 Dr. Irala 10 Bonds

11. 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

12. Understanding Duration  Of two bonds K & L which do you choose? And why? 0 12345 K (5,597)300020001000500200 L (5,597)2025506600

13. Dr. Irala 13 Bonds