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Unformatted text preview: er moves the bond market. Fixed Income III: R. J. Hawkins Econ 136: Financial Economics 24/ 24 Change in 1-Year Treasury Rate Why shocking ±400 bps may not be a bad idea. 1-year CMT YoY Probability Cumulative Change Probability 1.0 0.8 1-year YoY change 2-year YoY change 0.6 0.4 0.2 0.0 -1000 -800 -600 -400 -200 0 200 400 600 800 1000 Change in 1-Year Treasury Rate (basis points) Fixed Income IV: R. J. Hawkins Econ 136: Financial Economics 11/ 11 Price Risk: Duration, Convexity & DV01 350 Bonds have price risk. PRICE (points) 300 250 40.97 Points / % Price risk changes with yield level. 200 150 11.33 Points / % 100 4.22 Points / % 50 0 2 4 6 8 10 12 14 We want simple descriptors of price risk for small price changes. 16 YIELD (%) Let’s do a Taylor-series expansion of price P (Y + dY ) = P (y ) + dP 1 d 2P dY + (dY )2 + . . . dY 2 dY 2 Fixed Income II: R. J. Hawkins Econ 136: Financial Economics 4/ 19 Price Risk: Duration, Convexity & DV01 Interpreting the bond price Taylor series: dP 1 d 2P dY + (dY )2 + . . . dY 2 dY 2 dP 1 d 2P P (Y + dY ) − P (y ) ≈ dY + (dY )2 dY 2 dY 2 P (Y + dY ) = P (y ) + − dP ≡ Do...
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## This note was uploaded on 01/23/2014 for the course ECON 136 taught by Professor Szeidl during the Fall '08 term at University of California, Berkeley.

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