Lecture+17+Nov+14+2011

Lecture+17+Nov+14+2011 - FINA3104:...

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FINA 3104: Investment Analysis and Portfolio Management Lecture 17 – Managing Fixed Income Portfolios Darwin Choi November 14, 2011 Recap from Last Lecture The Term Structure under Certainty y t is the geometric average of short rates r t Forward Rates and Expected Short Rates y t is the geometric average of forward rates f Theories of the Term Structure f 12 = E( r 2 ) + , where > 0 or = 0 Interpreting the Term Structure 2
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Outline of Today’s Lecture Interest Rate Sensitivity Maturity, Coupon, Yield, and Duration Duration and Bond Price Sensitivity Determinants and Properties of Duration 3 Managing Bond Portfolios What is a Manager’s Main Concern? What affects bond prices? One major risk is Interest Rates Risk We can assess interest rates risk by the interest rate sensitivity of bond prices 4
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Interest Rate Sensitivity Bond Price vs. Yield to Maturity -60 -40 -20 0 20 40 60 80 100 120 140 160 - 5 - 4 - 3 - 2 - 1012345 Percent Change in Bond Price, P/P Bond Coupon Maturity YTM 12% 5 years 10% 12% 30 years 10% 3% 30 years 10% 3% 30 years 6% Percent Change in YTM, y/y A B C D A B C D 5 Bond Price and Yield Relations 1. Price and yield are inversely related. (negative slope) 2. An increase in yield causes a smaller price change than a decrease in yield (convexity).
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Lecture+17+Nov+14+2011 - FINA3104:...

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