43: Fixed Income Risk & Return Flashcards
The price sensitivity of a bond or portfolio to a change in the interest rate at one specific maturity on the yield curve.
Key rate duration
Used to estimate interest rate risk for non-parallel shifts in the yield curve
The duration of a zero-coupon bond is:
equal to its time to maturity; since the only cash flows made is the principal payment at maturity of the bond. Therefore, it has the highest interest rate sensitivity
Macaulay, modified, and effective duration are examples of:
analytical duration
Used to measure the sensitivity of a bond price to a parallel shift in the yield curve:
Duration and convexity are most likely to produce more accurate estimates of interest rate risk when the term structure of yield volatility is:
flat
Relationship between time to maturity maturity and yield (YTM) volatility
term structure of yield volatility
What cause an increase in a bond’s yield spread to the benchmark yield curve?
Widening of the spread:
credit risk
liquidity issues
When convexity is ____, duration will be less accurate in predicting a bond’s price for a given change in interest rates
higher
An approximation of the price sensitivity of a portfolio to parallel shifts of the yield curve
portfolio duration
Describes the yield curve when: yields for all maturities increase or decrease by equal amounts
Parallel shifts of the yield curve
The difference between a bond’s Macaulay duration and the bondholder’s investment horizon
Duration gap
If Macaulay duration is < than the investment horizon, the bondholder is said to have a negative duration gap and is more exposed to:
Downside risk (reinvestment risk) from decreasing interest rates
Market price risk increases when:
Interest rates rise
Which decreases the price of the bond
Used to measure the sensitivity of a bond price to a parallel shift in the yield curve
Effective Duration
