Interest Rate Sensitivity

# Interest Rate Sensitivity - Interest Rate Sensitivity...

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Taking the derivative of the bond’s price with respect to the YTM (a complex manipulation of the bond valuation formula): [ΔP/P] [ΔR/(1+R)] = -D Interest Rate Sensitivity 1 % change in price % change in yield Measure of interest elasticity to a small change in yield; add a negative sign since bond prices and yields move in the opposite direction.

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Interest Rate Sensitivity 2 To apply MD to a specific asset: We can do this to calculate the percentage change in price: ΔP/P = (-D) [ΔR/(1+R)] or- ΔP/P = (-MD)(ΔR) And, we can do this to calculate the dollar MD = D/(1+R)
3 Remember this example? What happens to the bond’s price if rates increase by 1 basis point (or 1/100th of 1%, or . MD = D/(1+R) 4.6231=4.993/(1.08) Yield: 8.0% Coupon Rate: 8.0% CF x DF x t Time Cash Flows Discount Factor Discounted Cash Flows Weighted Average 1 \$80 0.9259259 \$74.07 74.07 2 \$80 0.8573388 \$68.59 137.17 3 \$80 0.7938322 \$63.51 190.52 4 \$80 0.7350299 \$58.80

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## This note was uploaded on 01/26/2012 for the course FIN 4620 taught by Professor Patriciarobertson during the Spring '12 term at Kennesaw.

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Interest Rate Sensitivity - Interest Rate Sensitivity...

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