MM3 Q11B

Why use effective duration opposed to macually duration when calculating BPV?

Because this is an immunization question, so we’re concerned with interest rate sensitivity.

Effective duration is a measure of interest rate sensitivity; Macaulay duration is not.

In the MM Mock Exam 2 Question 21 - the answer is Macualy duration. Is this because the yield curve shift is small and the yield curve shift in the initial thread question is large?

No.

The reason is that the effective (or modified) duration of the liability is _ less than _ 2 years, so setting the effective (or modified) duration of the assets equal to 2 years will give you assets with a longer duration than the liabilities. Setting the Macaulay duration of the assets to 2 years will lead to an effective (or modified) duration of less than 2 years, more in line with the liability.