Money duration

CFA Level III Fixed Income
#1

This is a concept that I think I know by heart but some mock questions make me doubt myself.

Money duration is equal to which one below:

1/ Modified Duration * MV

2/ Modified Duration * MV * 0.01

Thanks

#2

I believe 2

#3

Welllllll maybe *.01 is dollar duration.

#4

Money Duration is according to Schweser defined as follows for a portfolio (or asset) of market value MV

money duration = MV*MD,

where MD modified duration. Essentially, it is the value impact on your portfolion of a 100% change in interest rates (e.g. *1)

Because that is not very useful assumption to work with in daily life you would resort to the money impact a change of 0.01% (i.e. 0.0001) in interest rates would have of your portfolio. This is the basis point value for your portfolio

bpv = pvbp = MV*MD*0.0001

#5

The money duration is dollar duration. And we all agree about the BPV :), we focus here only on the money duration.

So PreDraR66 chose the second formula and Mercutio chose the first one?

#6

It’s the second one. Duration is expressed in percent.

#7

?

#8

A duration of “5” implies a loss/gain of 5% in price given a parallel rise/fall in rates of 100bps so hence *.01 for money duration

#9

A (modified or effective) duration of 5 years.

#10

So magician, you think which one is the formula of money duration?

#11

understood but the practical application is change in value given change in rates. 5- years means nothing unless zero coupon

#12

Bear in mind that the rates of which you speak have units of % per year.

I respectfully disagree.

But what do I know? I’m not taking this stupid test.

#13

What I think matters not a whit.

What CFA Institute thinks is all that matters.

According to the 2018 CFA Level III curriculum, volume 4, reading 23, §3.2.1.1, p. 138, second paragraph, first sentence, “Money duration is market value multiplied by modified duration, divided by 100.”

Sounds a lot like formula 2.

#14

Thank you a lot magician.

#15

My pleasure.

#16

Wait what? I also have the reading in front of me (don’t know the page number as I print out from eBook.)

Reading 22, Section 4.2 Duration Matching, first paragraph:

…“Money duration, often called ‘dollar duration’ in North America, is the portfolio modified duration multiplied by the market value.”…

I guess it’s based on the context it’s used?

#17

Welcome to the world of CFA Institute.

I’ve e-mailed them. Let’s hope that their reply is prompt.

#18

i know the thread talking about money duration will filled with different voices.

i believe the second one 2/ Modified Duration * MV * 0.01 is a quote convention used by some institutes?

And by definition it should be 1/ Modified Duration * MV

CFAI book quote is not quite consistent, it drove me mad…

PVBP is Money duration * 1bp

welome discussion.

#19
  • MV = Market value (MV) * Modified Duration (MD)
  • PVBP = MV * MD * 0.0001

Please correct me if i am wrong.

#20

money duration should be MVxMD multiplied by 0.01 because we’re talking about 1% change in rates.

MVxMD alone would be much higher than MV because MD tends to be higher than 1 and it won’t make sense if a 1% change in interest rate causes a shift equal to MVxMD

e.g. MV is 1 million and MD is 5

if we don’t multiply it by 0.01, money duration = 5 million, which is absurd (1% decrease of rate/yield leads to 5 million gain for a 1 million portfolio?)

5 million x 0.01 = 50,000 which is much more sensible for a portfolio with MV of 1 million