Duration differences

CFA Level II
#1

Guys, need help grasping what the heck is the duration… There are so many versions of it. Can you guys distinguish the differences between effective duration, McCaulay duration, key rate duration, and the duration that is related to the changes on levels of interest rate (the same as the effective duration)???

#2

anybody can clarify this?

#3

effective takes into account options, mccaulay for cash flow i think, key rate is the individual nonparallel movements of each point on a yield curve, dono what u mean by the third one. the only one whose formula u really need to know is the effective duration (plus convexity)–its in the book

#4

I would be sure to know key rate duraiton for non-parallel shifts in the yield curve.

#5

Key-rate durations measure the price change to changes in yield at specific points on the yield curve. Macauly duration is the PV-weighted average number of years to receive each cash flow. Effective duration is used in measuring the sensitivity of prices for bullet portfolios and bonds to interest rate changes.

#6

Anybody for a hot sizzling Coupon Curve Duration vs Cash Flow Duration … drip? I dont remember it now.

#7

Coupon curve duration is based on the relationship between coupon rates and prices for similar MBS. Coupon----------- 10% 11% 12% Price ------------------103.25 105.9 110.35 CCD 11% = (110.35-103.25)/(2*105.9*0.01)=3.35

#8

Cash flow duration is a version of effective duration that allows for cash flows to change as interest rates change. Disadvantage: Based on the unrealistic assumption that a single prepayment rate exists over the life of a MBS for any given change in interest rates. Coupon curve duration is based on the relationship between coupon rates and prices for similar MBS. Disadvantages: 1) Limited to generic MBS, 2) Not readily applicable for CMO structures and other mortgage-based derivatives. Empirical duration is determined using regression analysis with historical prices and yields. Disadvantages: 1) Time series price data difficult to obtain, 2) Embedded options can distort the results, 3) Volatility of the spreads with reference to Treasuries can distort the price reaction to interest rate changes.

#9

Thanks frndz - nice refresher.