Doing some questions at the end of Reading 31 (Book 4), and am getting confused about duration again. In Q13, [content removed by moderator] Thoughts?
B Repos usually have no duration since the terms are already agreed upon and the price is not influenced by interest rates.
Yes, B b/c duration of 2 year repo is longer – on the liability side – than overnight repo (~0). so adding longer negative liability to portfolio would make overall portfolio duration shorter than if you add ~0 duration overnight repo. that came out a little convoluted, but i hope you get the point.
B for me too
sorry, can I check, how does a 2-year term repo has duration (or gets affected by interest rate)? Thanks.
Think of it as a 2-year zero-coupon bond.
Thanks S2000magician, sorry if i ask for a bit more context - I thought they do not have any duration since the terms are already agreed upon and thus the price would not be influenced by interest rates.
Happy V day.
My pleasure.
Isn’t the same true for any zero-coupon bond? You’re going to get $1,000 in five years, guaranteed. And its (modified) duration is a smidge less than 5 years. The price in 5 years isn’t the issue; the price today is.
So it is for a term repo. You’re going to get $850,000 in two years, guaranteed. So its (modified) duration will be a smidge less than 2 years. The price in 2 years isn’t the issue; the price today is.
Thank you S2000magician!
You’re welcome.