Book 4_Fixed_READING 59_YIELD-BASED BOND DURATION MEASURES AND PROPERTIES

Question 1

Modified duration

Answer 1

a linear estimate of the percentage change in a bond’s price that would result from a 1% change in its YTM:
- ModDur = MacDur / (1 + periodic return of bond)
- approximate percentage change in bond price = -ModDur × ΔYTM

Question 2

Modified duration can be approximated by repricing the bond at different yields:

Answer 2

Approximate modified duration = (V_ - V+)/(2Vo x delta YTD)

Question 3

Money duration

Answer 3

is stated in currency units and is sometimes expressed per 100 of bond value:
- money duration = annual ModDur × full price of bond position (total bond amount)

Question 4

The price value of a basis point

Answer 4

is the change in the value of a bond, expressed in currency units, for a change in YTM of one basis point:
PVBP = [(V- − V+) / 2] for delta = 0.01%
or = money duration × 0.0001.

Question 5

Holding other factors constant, duration will:

Answer 5

• Duration increases when maturity increases.
• Duration decreases when the coupon rate increases.
• Duration decreases when YTM increases.
• Duration decreases as time passes, but increases slightly on coupon dates.

Question 6

The price risk of the FRN

Answer 6

is very low because at the next coupon payment date, the coupons will reset to market rates, and the FRN price will reset to par.