The word duration is used frequently in CFA text and I’m not alway’s sure if it’s referring to (i) Effective Duration (ii) Modified Duration (iii) a measurement of how long, in years, the bond is I find this especially confusing in Classical/Multiliability Immunization: Schweser says to effectively immunize a single liability (classical immunization) need 2 things: 1. Select Bond Portfolio with Effective Duration = Duration of Liability (What is duration of liability here? Time in years? That is, 2-year bond has duration of 2?) 2. PV of Bond Portfolio = PV of Liability (I’m ok with this) CFA Text is even more vague that Schweser. It say’s Duration of Portfolio = Duration of Liability for single-liability immunization. Doesn’t give definition of Duration used. An Multiple Liability Immunization, they say liabilities/assets must have same aggregate duration. What type of Duration are they referring to here? Thanks in advance!
Don’t over think it. At L3 Duration is your ordinary “Macauley” Duration (a measure of how long it takes a bond to be repaid by its internal cash flows) and is consistently used as a measure of interest rate risk. Don’t get bogged down in material from previous levels, Binomial trees do not appear anywhere in the L3 curriculum, so effective duration is off the table, and the difference between duration and modified duration is whether the interest rate changes or not (no modified duration calculations required in L3 curriculum). Duration is used at L3 to measure interest rate risk exposure and match the bond portfolio to a benchmark. Most problems I have worked give you duration and ask you to calculate or interpret the dollar duration, then use dollar duration to determine the number of futures contracts needed to the interest rate risk.
sjuhawk Wrote: ------------------------------------------------------- > Don’t over think it. At L3 Duration is your > ordinary “Macauley” Duration (a measure of how > long it takes a bond to be repaid by its internal > cash flows) and is consistently used as a measure > of interest rate risk. Don’t get bogged down in > material from previous levels, Binomial trees do > not appear anywhere in the L3 curriculum, so > effective duration is off the table, and the > difference between duration and modified duration > is whether the interest rate changes or not (no > modified duration calculations required in L3 > curriculum). > > Duration is used at L3 to measure interest rate > risk exposure and match the bond portfolio to a > benchmark. Most problems I have worked give you > duration and ask you to calculate or interpret the > dollar duration, then use dollar duration to > determine the number of futures contracts needed > to the interest rate risk. Every you said is true excep "ordinary “Macauley” Duration " because you have plenty of option the MBS, CBS, that path dependency, Therefore, here, we must talking about “effective Duration”.