-In the curriculum-effective duration, it states that “the benchmark yield curve used is GOVERNMENT PAR CURVE and the assumption of calculating EFFECTIVE DURATION OF A BOND is parallel shift of par curve”.
And I don’t agree with this because we don’t need a parallel shift of par curve and the correct assumption is the parallel shift of SPOT CURVE or FORWARD CURVE. ( For ex, Because 1% change in benchmark yield curve of a 5 year bond is 1% change in par rate at 5 maturity or 1% change in spot rate at 1,2,3,4,5 maturity)
-Although I can’t demonstrate 1% change in spot rate at 1,2,3,4,5 results in 1% change in par rate at 5 maturity, I hope you can demonstrate this for me.
-To be honest, I still don’t understand the core meaning of the assumption of shifting parallel yield curve?
What are your opinions?
Nobody can; its not true.
Could you please explain why we need assumption: parallel shift of par curve in calculating EFFECTIVE DURATION?