Lecture 4_VOLATILITY

Lecture 4_VOLATILITY - Lecture4 BondPriceVolatility...

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Lecture 4 Bond Price Volatility L4 Xiaoding Liu 1 FIN4243 Fall 2009
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Topics Properties of price volatility Measures of price volatility Duration Convexity  L4 Xiaoding Liu 2 FIN4243 Fall 2009
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Bond Price Volatility We want to know how the price of the  bond changes to changing yields How big or small is the change? We want to know how different factors  affect the price of the bond differently? Coupon Term to maturity L4 Xiaoding Liu FIN4243 Fall 2009 3
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Price-Yield Relationship L4 Xiaoding Liu FIN4243 Fall 2009 4 Price Maximum Price Yield Convex
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Price Volatility Properties Four properties 1. Direction of change is the same for all option-free bonds,  but the percentage price change is not the same for all  bonds 2. For every small changes in the yield required, the  percentage price change for a given bond is roughly the  same, whether the yield increases or decreases 3. For large changes in the required yield, the percentage  price change is not the same for an increase in the  required yield as it is for a decrease in the required yield 4. For a given large change in basis points, the percentage  price increase is greater than the percentage price  decrease Think of convexity! L4 Xiaoding Liu FIN4243 Fall 2009 5
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Price Volatility  Characteristics Two characteristics of an option-free bond  determine its price volatility Coupon For a given term to maturity and initial yield, the  lower the coupon rate, the greater the price  volatility Term to maturity For a given coupon rate and initial yield, the longer  the term to maturity, the greater the price volatility  L4 Xiaoding Liu FIN4243 Fall 2009 6
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Measures of Bond Price  Volatility Money managers, arbitrageurs, and  traders need to have a way to measure a 
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This note was uploaded on 12/02/2009 for the course FIN 4243 taught by Professor Dudley during the Fall '08 term at University of Florida.

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Lecture 4_VOLATILITY - Lecture4 BondPriceVolatility...

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