What is the definition of Equity’s Duration ? What are the relationships among Equity’s Duration, Liability’s (Debt’s) Duration and Asset’s Duration ?
AMC, Equity’s risk measure is not duration, it’s beta.
derswap07 Wrote: ------------------------------------------------------- > AMC, > > Equity’s risk measure is not duration, it’s beta. derswap07, My understanding is that equity’s risk measure is beta too. However, please refer to the solution to the Schweser’s 2009 practice exam Volume 2 Eaxm 3 Q21.2.C (sorry I am using 2009 version of Schweser’s 2009 practice exam), equity’s duration is indicated there. This is what I am confused !
derswap07, Sorrym the equity duration is indicated in Schweser’s 2009 practice exam Volume 1 (not volume 2) Eaxm 3 Q21.2.C
derswap07, Sorry again ! My brain is overflowed ! The equity duration is indicated in Schweser’s 2009 practice exam Volume 2 Eaxm 3 Q21.2.C.
AMC, This q relates to swap duration !!!
derswap07 Wrote: ------------------------------------------------------- > AMC, > > This q relates to swap duration !!! Yes, it relates to swap duration. It seems that you have Schweser’s 2009 practice exams on hand. Do you ? But what is the definition of Equity’s Duration ? What are the relationships among Equity’s Duration, Liability’s (Debt’s) Duration and Asset’s Duration ? Can I find them in CFAI’s texts ?
Yes. I failed with band 9 last year. Are you talking about WACC?
derswap07 Wrote: ------------------------------------------------------- > Yes. I failed with band 9 last year. > > Are you talking about WACC? derswap07, As you said, it relates to swap duration. But it does not relate to WACC. If you do have Schweser’s 2009 practice exam book on hand, please refer to Volume 2 Eaxm 3 Q21.2.
derswap07 Wrote: ------------------------------------------------------- > Yes. I failed with band 9 last year. > I failed with band 8. Tou were better than me. I think You will pass in the forthcoming exam !
Equity duration = asset duration - liability duration I believe
(don’t have my books so this is from distant memory) If receiving fixed, paying floating, receiving fixed is your asset which has a higher duration than your liability, the pay floating component can anyone confirm this?
Interesting concept: http://www.brandes.com/Institute/Documents/Liability-Driven%20Investing%20and%20Equity%20Duration%200108.pdf I do not, however, recall having see anything quite like that in the CFA Curriculum
Not very clear about duration of equity but my understanding of duration of a swap: Fixed to floating swap (pay fixed and receive floating): Duration for above swap will be very close to duration of fixed rate bond, as the duration of quarterly payment floating rate bond nears 0.25 (less risk as interest rates are reset on a quarterly basis) Therefore for fixed to floating swap (fixed rate bond duration say 5) nears 4.75
tigerCFA is correct. I computed duration of equity in a former job. Since Assets = Liabilities + Equity, duration of assets = duration of liability + duration of equity. there is something in one reading about leveraged duration of equity. Finally … I have been asked about duration of equity in interviews … so know it.
Equity duration relates to duration of a leveraged portfolio. Duration is normally associated with fixed income assets, so the term can be confusing. But the rationale is this: Since part of the portfolio consists of borrowing , the borrower or equity owner has exposure to interest rates - for eg if interest rates go down, the liability increases, and equity could potentially go down. I say potentially go down because it depends on the duration of liabilities vs duration of portfolio. Mathematically, Dp= Dl*Wl +De*We (Dp=Duration of portfolio; Dl=duration of liabilities/borrowed funds; De=Duration of equity; Wl=weight of liabilities; We = weight of equity) De= (Dp-Dl*wl)/We Hope this explanation did not add to the confusion