The use of the concept of Duration appears to be context dependent in this program. Here’s what I *think* duration means:
Effective Duration : Change in bond price for 100 bp change in underlying interest rates
Modified Duration: Change in bond price for 100 bp change assuming cashflows do not change.
Key Rate Duration: Change in bond price for a specific change in future interest rates (IE only 10 year rates go up)
Duration: CFA assumes you aren’t painfully confused by simply referring to time as duration. Occaisionally. With little context.
Two questions:
1- When matching assets to liabilities, the duration of the bonds must exceed the liabilities. TIME duration, right?
2- With swaps…when pay floating has positive duration, and pay fixed has negative duration, which flavor duration are they referring to, effective?
This article I wrote may help dispel some of your doubts: http://financialexamhelp123.com/macaulay-duration-modified-duration-and-effective-duration/.
Remember that all of these durations measure the percent change in the bond’s price, not the dollar change in price.
They’re quite cavalier about it.
Yes: Macaulay duration. CFA Institute mixes effective duration (on the bonds) with Macaulay duration (on the liabilities). Improperly, in my opinion.
Yes: effective duration. It’s the only flavor of duration that makes sense for a floating rate bond (or, indeed, any bond with uncertain cash flows).
Bang on. Thanks S2000 Magician.
I’m glad to see that this is confusing for others, and that you have found a solution.
Thanks.
My pleasure.
Most of me wishes that it weren’t (but part of me is glad because it gives me something to do).
I’m happy to be of some small help.
qcw512
#5
Mark to remember to come back later