- What are the differences between duration, modified duration , effective duration and Macaulay duration? Also which duration should be used for calculating a price change for a given yield change. 2.What is the difference between yield based DV01 and DV01?
Effective duration can be used with bonds with embedded option. (V- - V+)/[2V0 change in y]. Mind: changes in y is given in bp use the decimal form in your computations Modified duration cannot be used with bonds with embedded options. Macauly is average time of CF received. For zero coupon bond this is the time to maturity. Relation mod and mac durartion: mac = mod (1+y) Other question I don’t know.
Macaulay Duration: Weighted average time in years until you get your money back Modified Duration: Price change of a 100 bp parallel shift in rates. Does not take optionality into account. If bonds have no optionality you can use this for a calculation of a price change. Effective Duration: Duration-type measure that does take optionality into account. Use this for callable bonds (or any bond with optionality). Yield-based DV01: DV01 of a change of 1 bp in the YTM of a bond. “Regular” DV01: DV01 of a change of 1 bp in the duration of a bond.
What is the Duration VAR formula? The practise exams mention it, but I can’t fine it in either the handbook or Schweser.
@FinforLIL is it delta VaR or Delta Normal VaR ? VaR = Modified duration * sigma * yield volatility * Portfolio value it is a VaR method which is used to calculate VaR for shorter horizon than longer horizon , basically it accounts for small changes in yield , it is accurate for linear exposures
FH is correct it is basically like delta-normal VAR only we replace the delta and use the modified duration instead.