questions need to clarify

1: For endowment and foundation, should the liquidity requirement include management expense? 2: If the company uses swap to change the current fixed rate loan into a float rate loan (pay float, receive fixed), what the effect on company’s market value risk and cash flow risk? 3: The larger human capital the greater demand for life insurance, right or not? thanks in advance!

1: Foundation gifting and administration expenses are rolled into the 5%, investment management fees are separate but included in the liquidity requirement. 2: Market value risk goes down, cash flow risk goes up? 3: Have to look at human capital / total wealth ratio. If ratio increases, demand for life insurance increases provided the desire to bequest is the same. I have a question, what are the differences in duration between two bonds of the same maturity, one pays fixed, one pays floating?

Black Swan Wrote: ------------------------------------------------------- > I have a question, what are the differences in > duration between two bonds of the same maturity, > one pays fixed, one pays floating? Swan, doesn’t it depend on how often settlement occurs with the floating? If quarterly the most it will be is 0.25, semi-annually: 0.50, etc. Right?

I don’t know, I haven’t reached that reading yet. Sounds feasable, so I’ll take this answer unless I get a different one.

sterling76 Wrote: ------------------------------------------------------- > Black Swan Wrote: > -------------------------------------------------- > ----- > > > I have a question, what are the differences in > > duration between two bonds of the same > maturity, > > one pays fixed, one pays floating? > > Swan, doesn’t it depend on how often settlement > occurs with the floating? If quarterly the most > it will be is 0.25, semi-annually: 0.50, etc. > Right? I am pretty sure you divide the payment frequency by two, thus if floating pays semi-annually you would have a duration of 0.25, if it pays annually then you have a duration of 0.5

if you are the holder one has price risk and the second one has reinvestment risk.

to black Q2: suppose the equity of company is positive, and suppose through the swap, the duration of equity gets larger (it is common situation), should the market value risk goes up? Q3: on study notes Book 2 page 152, answer to quesiton of 8, it said “life insurance has perfect negative correlation with human capital” is it right? for you question, I think muturity is not duration and duration of float rate bond depends on payment frenquency. Thanks

florinpop Wrote: ------------------------------------------------------- > if you are the holder one has price risk and the > second one has reinvestment risk. Could you explain this?

patkeenan Wrote: ------------------------------------------------------- > I am pretty sure you divide the payment frequency > by two, thus if floating pays semi-annually you > would have a duration of 0.25, if it pays annually > then you have a duration of 0.5 This can’t be the case because each settlement period acts like a zero. You wouldn’t divide by two. And florin, doesn’t fixed have price/market risk, floating has income risk, and both have reinvestment risk?

the fixed bond has a higher duration which we can aproximate to be the maturity. because of the higher duration it has a higher price risk (market value risk) but a low income risk. Paying a fixed cupon you know the exact cash flows that you will receive ( except in case of default) . because the cash flow is fixed, the price will change to create a yield comparable to the market The floating rate has only a low duration. Because the cash flow(cupon) is reset at times, the value will fluctuate only to relfect a change in yield until the reset occurs. Therefore the price risk is small but the cash flow income risks) are unknown. For floating rate bonds let’s say that reset every 1 year you will have a duration of aprox 1 at beginning, the duration will fall during the period and reach 0 at reset. So in this case you could talk about an average 0.5 duration

both have reinvestment risk, my bad

florinpop Wrote: ------------------------------------------------------- > the fixed bond has a higher duration which we can > aproximate to be the maturity. because of the > higher duration it has a higher price risk (market > value risk) but a low income risk. Paying a fixed > cupon you know the exact cash flows that you will > receive ( except in case of default) . because the > cash flow is fixed, the price will change to > create a yield comparable to the market > > > The floating rate has only a low duration. Because > the cash flow(cupon) is reset at times, the value > will fluctuate only to relfect a change in yield > until the reset occurs. Therefore the price risk > is small but the cash flow income risks) are > unknown. > For floating rate bonds let’s say that reset every > 1 year you will have a duration of aprox 1 at > beginning, the duration will fall during the > period and reach 0 at reset. So in this case you > could talk about an average 0.5 duration Hmm, I’ve always heard of duration as jsut being duration, not sure why you’re averaging it down to .5 in this case. Also, doesn’t reinvestment risk have to do wthh the rate at which you’ll reinvest, not how much money you’ll have to reinvest? The issue of how much you’ll have to reinvest would fall more under the cash flow risk.

popo Wrote: ------------------------------------------------------- > to black > Q2: suppose the equity of company is positive, and > suppose through the swap, the duration of equity > gets larger (it is common situation), should the > market value risk goes up? It sounds like the market value risk of the equity would go up, but I’m not sure, let someone else take that one. > Q3: on study notes Book 2 page 152, answer to > quesiton of 8, it said “life insurance has perfect > negative correlation with human capital” is it > right? This is right, they’re not referring to the demand of life insurance, they’re just saying that obviously when you die, the life insurance value to the wealth portfolio increases while your human capital has just been eliminated. However if you don’t die, the value of the human capital remains pretty large in the portfolio while the life insurance continues to just be a cost.

in the case of floating rate (1year in our case) a 10 year bond that resets yearly is basically equivalent ( at least to me) to 10 1year bonds that are consecutive. on the averaging issue. a 2 year bond that was issued a year ago has same duration as a 1 year bond that is issued today average of a duration has no meaning- you are correct here- but for a 1 year bond the duraton declines to 0. Duration really materializes when interest rates change.

Okay, I didn’t get what you were saying at first, that makes sense. Quick question, if you have three bonds of equal weight in a portfolio with durations of 1, 2, and 3 years, is the portfolio duration simply equal to the arithematic mean (2)?

Hell yeah! BTW, you add dollar durations.

yes port duration is calculated as you would calculate portfolio return.