Bonds

Question 1

Relationship between bond price & yield to maturity

Answer 1

Inverse relationship
When y increase, B decrease

Question 2

Duration

Answer 2

Average time before you get your money back.

Shows how sensitive a portfolio is to changes in the rate.

Similar to Delta.

Question 3

Convexity

Answer 3

Measures the curvature in the relationship between larger changes in yields and the change in bond prices.

Similar to Gamma.

Question 4

Modified Duration

Answer 4

MD = D / ( 1 + y/m )

Measures percentage change in price, if there is a unit change in the yield.
If the yield goes up by 1, the price of the bond changes by MD%.

With continuous compounding MD = D

Question 5

Duration: First-order (linear) approximation

Answer 5

–DΔy

Question 6

Dollar Duration

Answer 6

D$ = BD

Question 7

Absolute change in bond price

Approximation

Answer 7

Use dollar duration & dollar convexity in the second-order (quadratic) approximation.

Question 8

Dollar Convexity

Answer 8

C$ = BC