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KIC000056 - Duration Volatility and Uses Duration captures...

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Unformatted text preview: Duration, Volatility and Uses * Duration captures the things we talked about earlier related to bond volatility (holding other factors constant]: 1) longer maturity = greater duration = more volatility 2) lower coupon rate = greater duration = more \‘aolatllity - Major use is to duration match a portfo|io of liabilities to assets so that you are not exposed to changes in rates. Better than cash flow matching - Key use: Approximating percentage price changes from yield change => dP dy*-1’ Modified duration = ? Portfolio Du ration - Duration can be weighted by the portfolio weight to get the duration of the portfolio. k bonds => I Dl'mfiiia 5 EM).- ill - Each bond contributes to the duration depending on weight => - E4, in your pardoiio you hm: — 6.: bond: curlendy worth $10,500 with a duration 0' 75 years Contribution |55 — IBM hondl currently worth $15,000 with a duration of 12 yurs. contribution is 7.: - The Hits om: portfolio at: (10/25) and (15/15), th-rature its duration l5 => B = (tn/25} (1.!) 4 [15/25) [12] = 10.20 years. Required Annual Yield Cindi): “Moan: _ o sh?!» °/adp=«l$ib-1X‘Z= 209910 = ‘th‘l-Whfl'flnm’rhggah-L ...
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