Fixed Income: Duration and Convexity Summary (FRM T4-42)
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- Äas pĆidĂĄn 24. 07. 2019
- In this playlist, I've already recorded at least ten videos on duration and convexity which are the two most common measures of single-factor interest rate risk. So, in this video, we wrap it up in one simple explanation that tries to illustrate both duration and convexity and how we apply them with the simplest possible example.
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6 hours of lectures = 12min of Bionic Turtle video on Duration and convexity
Thank you! FYI, >10 years of teaching bonds, being WRONG about so many details along the way, answering 100s of questions, some brilliant, receiving insights from customers along the way, Q&A that somehow reveals new layers each year, being corrected by professors who know more than me, customers forcing me back to the texts every year --> all of this work "in the kitchen" for YEARS makes possible a 12 minute explanation :) There is nothing harder for me than being glib.
Great video. Crisp, simple and exactly what I was looking for.
Crystal clear ... all the big picture. Well done for all the Fixed income videos. Merci beaucoup
Thanks for this summary video on Duration and Convexity.
I wish to seek your help on below two queries.
1.So PVBP or DVO1 is slope of the yield curve and is linear approximation of interest rate risk for Bonds.
2. For Eurodollar futures the PVBP is a constant number always like I believe its 25 for 3 month Eurodollar futures, however PVBP is dynamic number for Australian Government Bond futures which are quoted as 100- Yield
Thanks in advance
I LOVE YOUR VIDEOS!!!
Brilliant explanation..
Tnx a lot!
Hi, Thank you very much !It helped me alot!! Where can I find the excel file ?
Quick question: If I see that an investment grade corporate bond has a duration of 6, I understand that a 1% move in rates results in -6% in the bond price, but WHAT RATES ARE WE TRACKING? The 10 Yr treasury? 5 year treasury? Thank you!!
Thank you
David you are an amazing resource for FRM candidates. I have one question on your spreadsheet. For the PV of 102 (year 3) you have $87.95. But I have been trying to get the same answer. However, when I match the discount of 102/1.05^3 I get 88.11 for the year 3 PV of the final cashflow on the bond. All other cashflow PVs match to your outputs. I am not sure how you are getting 87.95... What am I missing?
Thanks for your kind words! Your is correct with annual compounding, but mine uses semi-annual compounding (consistent with the semi-annual payments) such that $102.00/(1+5.0%/2)^(3*2) = $87.95. As expected, less than yours (or put another way, 87.95 grows to the same 102.00 with s.a. compound frequency, as would 88.11 with annual compound frequency). Due to rounding and smaller amounts, the small difference didn't reveal on the coupons. Hope that's helpful,
Modified duration * - 1 should be - 2.785%. Why have you ignored the sign? Can you please explain
I didn't ignore the negative, see 8:14 where D = -H19*L13 = -D_mod * ÎYield; that "D" just refers to the duration adjustment. A negative yield shock (-1.0% is shown) should imply a positive duration adjustment (+2.785%). The dollar duration (DD) = -âP/ây and modified duration = =1/P*âP/ây where the slope of the tangent line, âP/ây, is itself negative. Thanks,
@@bionicturtle thank you for the clarification
you have the terms wrong, it should be 1,2,3,4,5,6 not 0.5,1,1.5... because when you divide the 4% coupon by two you now have a periodic rate
I don't think so. The PV cash flows are given by FV*(1+4.0%/2)^-(t*2) so the exponents in discounting are {1, .., 6}. And the duration is weighted average maturity in years so we'd use the terms in years for that. So i don't see the problem