EC3333 Notes08 - Notes 08 Bond Duration and risk management...

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Unformatted text preview: Notes 08 Bond Duration and risk management Bond Price Volatility: Interest Rate Risk } ) 1 ( ) 1 ( { dy Price d : ) 1 ( ) 1 ( Price 1 1 1 1 T T t t t T T t t t y Value Par T y tC YTM y y Value Par y C Bond Volatility: Interest Rate Risk y C When y Value Par y C y Value Par T y tC t T T t t t T T t t t 1 T Price / dy Price d , ) 1 ( ) 1 ( } ) 1 ( ) 1 ( { Price / dy Price d 1 1 1 1 Long-term bonds tend to be more price sensitive than short-term bonds: long term income discounted more heavily; i.e. sensitivity increases with maturity T Bond Volatility: Interest Rate Risk Inverse relationship between price sensitivity wrt. yield and coupon rate : * Higher coupon rate means more income associated with closer maturity (less discounted) This sensitivity is inversely related to the current YTM Bond Volatility: Interest Rate Risk Change in Bond Price as a Function of Change in Yield to Maturity Price Elasticity T t t T t t t T T t t t T T t t t w t y CF t y Value Par T y C t y Value Par T y tC 1 1 1 1 1 1 Price ) 1 /( } Price ) 1 /( Price ) 1 /( { Price / y) (1 } ) 1 ( ) 1 ( { y) y)/(1 d(1 Price / Price d t t t w CF y ice ( ) 1 Pr t w t D T t 1 CF Cash Flow for period t t Duration: Calculation...
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EC3333 Notes08 - Notes 08 Bond Duration and risk management...

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