CIA.Duration Flashcards
Identify the 3 types of duration.
- Modified
- Macaulay
- Effective
How do you calculate the Macaulay duration?
Weighted average of time where the weights are the cash flows (PV)
How do you calculate the modified duration?
Macaulay duration / (1 + discount rate)
Identify the 4 reasons that make the concept of duration so important.
- Calculating interest rate risk margin
- Calculating investment return rate risk margin
- Matching assets & liabilities
- Modeling market risk
What does duration measure?
Average maturity of fixed future cash flows
Sensitivity of PV cash flows to interest rate changes
If there are k payments, is the calculation of the Macaulay duration the same?
Yes, except at the end, you divide by k.
Effective and modified duration gives a similar answer when….?
Interest rate changes do not affect future cash flows.
True or False?
Either the modified or effective duration is acceptable in calculating the duration of assets and liabilities for the interest rate risk margin in MCT.
True, as long as the one chose is used consistently.
What is the difference between modified duration and effective duration?
Effective duration accounts for situations where a change in interest rates changes the cash flows.
Modified duration does not account for this.
Briefly describe the concept behind ‘modified duration’.
The modified duration is the approximate % change in PV(cash flows) from a 100 bps change in interest rate assuming no change in cash flows.
Briefly describe the concept behind ‘effective duration’.
The effective duration recognizes that a change in interest rate may also cause a change in cash flows.
True or False?
It is permissible for the actuary to rely on an investment specialist for the calculation of asset duration.
True, the actuary would be the ENQUIRING professional, and the investment specialist would be the RESPONDING professional
The actuary must review the investment specialist’s work for methodology and reasonableness
