Durations

Question 1

What is the Macaulay duration and how to calculate it?

Answer 1

It is the holding period for which reinvestment and price risks are rebalanced. It is calculated by PV of future cash flows/PV of the bond

Question 2

What is the modified duration and how is it calculated?

Answer 2

Measures a bond’s price sensitivity to interest rate changes. Higher duration = greater price sensitivity to interest rate changes. It is equal to Macaulay Duration/ (1+r)

Question 3

How do you calculate the annualized Mod Dur?

Answer 3

AnnModDur = ((Pv-)-(Pv+))/2PVoDyield

Question 4

Relationship between investment horizon and MacDur?

Answer 4

MacDur=duration gap + investment horizon

Question 5

What is money duration and how is it calculated?

Answer 5

Measures the dollar (or currency) change in a bond’s value for achange in interest rates. Higher money duration = bigger $ impact
MonDur=AnnModDur*PVFull

Question 6

What is a Price Value of Basis Point and how is it calculated?

Answer 6

The change of full price if yield changes by 1bp. PVBP = (PV-)-(PV+)/2

Question 7

What is the MacDur of a Floating note?

Answer 7

MacDur floating = (T-t)/T

Question 8

Effective duration?

Answer 8

Measures a bond’s price sensitivity to small parallel shifts in the yield curve, accounting for embedded options. Higher effective duration = greater interest rate risk.
(P-)-(P+)/2PoDcurve

Question 9

What does key rate duration measure?

Answer 9

It provides insights on a bond‘s sensitivity to changes in the benchmark yield curve

Question 10

What is the Macaulay duration and the modified duration of a zero coupon bond?

Answer 10

Macaulay duration = Time to maturity
ModDur = MacDur/(1+annual yield)

Question 11

Macaulay duration

Answer 11

Weighted average time of cash flows

Question 12

Modified duration

Answer 12

Mac Dur / (1 + r)

Question 13

Price sensitivity formula

Answer 13

–ModDur × Δyield

Question 14

PVBP

Answer 14

Price change for 1 bp move

Question 15

Money duration

Answer 15

ModDur × price

Question 16

Duration gap

Answer 16

Mac Dur – horizon

Question 17

Positive duration gap

Answer 17

Price risk dominates

Question 18

Negative duration gap

Answer 18

Reinvestment risk dominates

Question 19

Zero-coupon duration

Answer 19

Equal to maturity

Question 20

Perpetual duration

Answer 20

(1+r)/r

Question 21

FRN duration

Answer 21

Time to next reset

Question 22

Duration increases with

Answer 22

Maturity

Question 23

Duration decreases with

Answer 23

Coupon

Question 24

Realized return = YTM if

Answer 24

Hold to maturity + reinvest at YTM

Question 25

Interest rate risk

Answer 25

Price sensitivity to yield changes

Question 26

Reinvestment risk

Answer 26

Uncertainty of reinvestment rates

Question 27

Short horizon effect

Answer 27

Price risk dominates

Question 28

Long horizon effect

Answer 28

Reinvestment risk dominates

Question 29

Duration for portfolio

Answer 29

Weighted average or aggregate

Question 30

Parallel shift assumption

Answer 30

Used in duration, All interest rates across the yield curve change by the same amount (in basis points).