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Unformatted text preview: to maturity. Term structure of interest rates  The relationship between yields to maturity and terms to maturity across bonds. Expectations hypothesis  the theory that yields to maturity are determined solely by expectations of future short term interest rates. Forward rate  The inferred short term rate of interest for a future period that makes the expected total return of a long term bond equal to that of rolling over short term bonds. Managing Bond Portfolio [Chapter 11] Interest Rate Risk – see handout Duration  A measure of the average maturity of the bond's promised cash flows. Macaulay’s Duration  A measure of the effective maturity of a bond, defined as the weighted average of the times until each payment, with weights proportional to the present value of the payment. Modified Duration  Macaulay's duration divided by 1+yield to maturity. Measures interest rate sensitivity of bond. What Determines duration 1.
The duration of a zero coupon bond equals it's time to maturity 2.
With time to maturity and yield to maturity held constant, a bond's duration and interest rate sensitiv...
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 Spring '14
 Chang

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