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Chapter 4
Change
Percentage Price Change (coupon/maturity in years)
in BP
9%/5
9%/25
6%/5
6%/25
0%/5
0%/25
300
12.8
38.59
13.47
42.13
15.56
106.04
200
8.32
23.46
8.75
25.46
10.09
61.73
100
4.06
10.74
4.26
11.6
4.91
27.1
50
2
5.15
2.11
5.55
2.42
12.72
10
0.4
1
0.42
1.07
0.48
2.42
1
0.04
0.1
0.04
0.11
0.05
0.24
1
0.04
0.10
0.04
0.11
0.05
0.24
10
0.39
0.98
0.41
1.05
0.48
2.36
50
1.95
4.75
2.05
5.09
2.36
11.26
100
3.86
9.13
4.06
9.76
4.66
21.23
200
7.54
16.93
7.91
18.03
9.08
37.89
300
11.04
23.64
11.59
25.08
13.28
50.96
Price Volatility
Initial Price
(9% Yield)
100
100
88.1309
70.357
64.3928
11.071
Price
at 9.01%
99.9604
99.9013
88.0945
70.2824
64.362
11.0445
Price Value
of a BP
0.0396
0.0987
0.0364
0.0746
0.0308
0.0265
Duration
Duration
Exhibit 4-5. Calculation of Macaulay Duration and Modified Duration
Coupon rate: 9.00%
Term (years): 5
Initial yield: 9.00%
Period, t
CF PV of $1 at 4.5%
PV of CF
t x PVCF
1
$4.50
0.956937
4.30622
4.30622
2
4.50
0.915729
4.120785
8.24156
3
4.50
0.876296
3.943335
11.83
4
4.50
0.838561
3.773526
15.0941
5
4.50
0.802451
3.61103
18.05514
6
4.50
0.767895
3.455531
20.73318
7
4.50
0.734828
3.306728
23.14709
8
4.50
0.703185
3.164333
25.31466
9
4.50
0.672904
3.02807
27.25262
10
104.50
0.643927 67.290443
672.90442
100
826.87899
Duration
Exhibit 4-6. Calculation of Macaulay Duration and Modified Duration
Coupon rate: 6.00%
Term (years): 5
Initial yield: 9.00%
Period, t
CF
PV of $1 at 4.5%
PV of CF
1
$3.00
0.956937
2.870813
2
3.00
0.915729
2.74719
3
3.00
0.876296
2.62889
4
3.00
0.838561
2.515684
5
3.00
0.802451
2.407353
6
3.00
0.767895
2.303687
7
3.00
0.734828
2.204485
8
3.00
0.703185
2.109555
9
3.00
0.672904
2.018713
10
103.00
0.643927
66.324551
88.130923
t x PVCF
2.87081
5.49437
7.88666
10.06273
12.03676
13.82212
15.43139
16.87644
18.16841
663.24551
765.8952
Modified Duration
Duration
Duration
Portfolio Duration
Bond
10% 5yr
8% 15yr
14% 30yr
Bond
10% 5yr
8% 15yr
14% 30yr
Price ($)
100.0000
84.6275
137.8586
Market Value
$4,000,000
$4,231,375
$1,378,586
Yield (%)
10
10
10
Duration
3.861
8.047
9.168
Portfolio Duration
Bond
Market Value
10% 5yr
8% 15yr
14% 30yr
$4,000,000
$4,231,375
$1,378,586
Duration
Price-Yield Relationship
Convexity
convexity measure
1
2
3
4
5
6
7
8
9
10
CF
$4.50
$4.50
$4.50
$4.50
$4.50
$4.50
$4.50
$4.50
$4.50
$104.50
t(t + 1)CF
0.876296
0.838561
0.802451
0.767895
0.734828
0.703185
0.672904
0.643927
0.616198
0.589663
9
27
54
90
135
189
252
324
405
11,495
12,980
7.886
22.641
43.332
69.11
99.201
132.901
169.571
208.632
249.56
6,778.19
7,781.02
1
2
3
4
5
6
7
8
9
10
CF
$3.00
$3.00
$3.00
$3.00
$3.00
$3.00
$3.00
$3.00
$3.00
$103.00
t(t + 1)CF
0.876296
0.838561
0.802451
0.767895
0.734828
0.703185
0.672904
0.643927
0.616198
0.589663
6
18
36
60
90
126
168
216
270
11,330
12,320
5.257
15.094
28.888
46.073
66.134
88.601
113.047
139.088
166.373
6,680.89
7,349.45
Convexity
% Price Change
estimated price change due to duration and convexity is 21.24% + 3.66% = -17.58%
Convexity
implication of convexity
for bonds when yields
change
market takes convexity
into account when
pricing bonds
Convexity
1.
2.
3.
Approximating Duration
1.
2.
3.
Approximating Duration
1.
2.
3.
Approximating Convexity