1 / 12

Duration and Interest Rate Risk

Duration and Interest Rate Risk. Why Study Duration. Duration: measures the sensitivity of bond price change on interest rate change Objective: to see how much price change in bond value due to interest rate changes – a way to gauge interest rate risk. What is Duration?

sirvat
Télécharger la présentation

Duration and Interest Rate Risk

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Duration and Interest Rate Risk

  2. Why Study Duration • Duration: measures the sensitivity of bond price change on interest rate change • Objective: to see how much price change in bond value due to interest rate changes – a way to gauge interest rate risk

  3. What is Duration? A measurement of the life of the bond on a present value basis Formula for Duration How to Calculation Duration - find bond price - find discounted cash flow in each period - go through the worksheet

  4. Calculate Duration on a $1000 Ten-year 10% Coupon Bond When its interest rate is 10% (Table 4)

  5. Calculate Duration on a $1000 Ten-year 10% Coupon Bond When its interest rate is 20% (Table 5)

  6. Calculating Duration, i = 20% 10-yr 10% Coupon Bond

  7. Everything else equal, • 1. When the maturity of a bond lengthens, the duration rises as well. • 2. When interest rates rise, the duration of a coupon bond falls.

  8. 3. The higher is the coupon rate on the bond, the shorter is the duration of the bond. • 4. Duration is additive: the duration of a portfolio of securities is the weighted-average of the durations of the individual securities, with the weights equaling the proportion of the portfolio invested in each.

  9. Exercise Calculating duration for an 11-year 20% coupon bond when current interest rate is 10%

  10. Duration and Interest-Rate Risk • %ΔP - DUR x Δi/(1+i) • i 10% to 11%: • For a coupon bond with coupon rate of 10%, DUR = 6.76 Yrs • %ΔP = • ΔP =

  11. For a 10 year, 20% coupon bond, DUR = 5.72 Yrs, if interest rate increases from 10% to 11% %ΔP = ΔP =

  12. Duration and Interest-Rate Risk • The greater is the duration of a security, the greater is the percentage change in the market value of the security for a given change in interest rates. Therefore, the greater is the duration of a security, the greater is its interest-rate risk.

More Related