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Study Session 16: Fixed Income: Analysis of Risk

Effective Convexity Question

See practice question below - in the solution why does PV0 change in the denominator (it appears they have just dropped a 9)?

Thanks in advance!

Modified duration and Money duration

Hi!

I am having troubles studying about Modified duration and Money duration, and hoping to get some helps.

1. Modified duration can be used to measure the percentage price change upon absolute change in YTM. I am confused about YTM here. Modified duration can be shown as

Modified duration = (dP/P)/d(1+r)          

And I think the r here represents periodic interest rate.

Convexity Question

In the Schweser notes, reading #54, it states that “for two bonds with equal duration, the one with cash flows that are more dispersed over time will have the greater convexity.”

Why is this?

Convexity Adjustment

Hey! Can you please help me with following question?

We have a YTM for 3 year bond and for 5 year bond of one type and on one yield curve. We can calculate a yield for 3 year bond. However, the yield for 3-year is on the line between 2 and 5.
How to make a 3 year YTM on the curve? With another words, I do not know how to make an adjustment for convexity for 3 YTM. Thank you!

Bond YTM - clean or dirty price for PV

Hi all,

I notice that most brokers in Bulgaria calculate the YTM of a bond using its dirty price. However, I believe this is incorrect and the clean price should be used. I didn`t find any reference in the CFA curriculum that clarifies this.

Notching

Hey guys, 

Quick discussion of the following question:

The notching adjustment for corporate bonds rated Aa2/AA is most likely:

  1. larger than the notching adjustment for corporate bonds rated B2/B.

  2. the same as the notching adjustment for corporate bonds rated B2/B.

  3. smaller than the notching adjustment for corporate bonds rated B2/B.

Portfolio duration

Can someone help me understand this question a little better from Schweser?