Zero coupon bond duration

    • [PDF File]Bonds - Finance Department

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      Zero Coupon Bonds zWhy do zero-coupon bond prices change?...Interest rates change! zThe price of a zero-coupon bond maturing in one year from today with face value $100 and an APR of 10% is: zExample: Now imagine that immediately after you buy the bond, the interest rate increase to 15%. What is the price of the bond now 0 ()1 N F V i = + 0 ()1 ...

    • [PDF File]Duration - New York University

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      Duration 4 yFor zero-coupon bonds, there is a simple formula relating the zero price to the zero rate. yWe use this price-rate formula to get a formula for dollar duration. Computing Dollar Duration for a Zero-Coupon Bond The Price-Rate Function for a Zero At a rate of 5%, the price is 0.2273 If rates fall to 4%, the price is 0.3048 The actual ...

    • [PDF File]Duration - New York University

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      Duration 12 Example: Zero-Rate Dollar Duration of a Coupon Bond The zero-rate dollar duration of $1 par of a T-year bond with coupon rate c is This is the dollar price sensitivity to a parallel shift in the zero yield curve. Example: dollar duration of $1 par of a 1-year 6%-coupon bond: € c 2 [0.5 (1+r 0.5 /2) 2 + 1 (1+r 1 /2) 3 + 1.5 (1+r 1. ...

    • [PDF File]Duration and Bond Price Volatility: Some Further Results

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      The derivation of the above expression is justified on the ground that any coupon bond has a “sister” zero-coupon bond with the same duration and price (Shirvani and Wilbratte, 2002). This result builds on the fact that duration is the center of gravity of a bond. The intuition of this fact can be appreciated with

    • [PDF File]HOW TO PREPARE FOR THE FINAL - New York University

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      30. Assume a zero coupon bond has duration = 10 years and a 30 year bond has an 18% coupon and a duration =10 years. Assume further that the yields on both bonds are the same and then change by the identical infinitesimally small amount. Then, the price volatility of the 30 year will be: a. Equal to the price volatility of the zero b.

    • Default Risk and the Duration of Zero Coupon Bonds - JSTOR

      II. Duration of a Zero Coupon Bond The duration of a nontaxable default-free zero coupon bond is well known to equal its maturity. However, many zero coupon bonds are neither nontaxable nor default free. Little (1984) has examined the case of default-free taxable zero coupon bonds. This paper focuses on the second case, nontaxable zero coupon

    • [PDF File]Measuring Interest-Rate Risk: Duration - Florida International University

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      a so-called zero-coupon bond, makes all of its payments at the end of the ten years, ... The duration of a coupon bond is also affected by its coupon rate. For example, consider a ten-year 20% coupon bond when the interest rate is 10%. Using the same procedure, we find that its duration at the higher 20% coupon rate is 5.98 years versus ...

    • [PDF File]MATH 4512 — Fundamentals of Mathematical Finance Topic One — Bond ...

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      Relationship between duration and maturity 1. For zero-coupon bonds, duration is always equal to maturity. For all coupon-bearing bonds, we observe duration → 1 + 1 i when maturity increases infinitely. The limit is independent of the coupon rate. 2. Coupon rate ≥ interest rate (bonds above par)

    • [PDF File]Duration and Convexity of Zero-Coupon Convertible Bonds - UMM

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      Schwartz (1980) to value a zero-coupon convertible corporate bond, from which we derive its duration and convexity. We will begin the analysis (Section II) with the duration and convexity of a zero-coupon convertible bond, a comparison with a straight (non-convertible) bond, and the response to parameter value changes. In Section III, we will

    • [PDF File]Lecture 09: Multi-period Model Fixed Income, Futures, Swaps

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      Consider the 3-year zero-coupon bond with price $81.63 and yield 7% ... • The value of the resulting portfolio with duration zero is B 1 +NB 2 • Example 7.8 We own a 7-year 6% annual coupon bond yielding 7% Want to match its duration by shorting a 10-year, 8% bond yielding 7.5%

    • [PDF File]A Guide to Duration, DV01, and Yield Curve Risk Transformations

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      duration. In practice a bond or other fixed-income security will often be valued off a yield curve, and we can extend the ... would be to work with zero-coupon yields of maturity 1, 2, 5, and 10 years. Using such a curve and such rates for our 10 year zero the partial DV01s would be: Table 1 - Partial DV01(w.r.t. zero yields) for 10 Year Zero Bond

    • [PDF File]Fixed-Income Securities Lecture 4: Hedging Interest Rate Risk Exposure ...

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      E ective duration captures the good features of duration while addressing its lack of exibility. The e ective duration of an interest-sensitive security is the time-to-maturity of the zero-coupon bond with the same interest sensitivity. If we are looking at nonrandom claims, the e ective duration is equal to Macauley duration.

    • [PDF File]Understanding Duration - BlackRock

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      rates, duration allows for the effective comparison of bonds with different maturities and coupon rates. For example, a 5-year zero coupon bond may be more sensitive to interest rate changes than a 7-year bond with a 6% coupon. By comparing the bonds’ durations, you may be able to anticipate the degree of

    • [PDF File]20 - Bond Duration and Convexity - Rutgers University

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      Coupon Zero Coupon Zero Zero Coupon Bond Duration and Convexity Introduction (Continued) Bond Duration and Convexity Introduction (Continued) Economics of Capital Markets Version 1.0 Outline Page 10 The sensitivity of a bond’s value to changing interest rates depends on both the length of time to maturity and on the pattern

    • [PDF File]APPENDIX 3A: Duration and Immunization - Babson College

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      maturity and duration zero-coupon bond or a coupon bond with a five-year duration, the FI would produce a $1,469 cash flow in five years, no matter what happens to interest rates in the immediate future. Next we consider the two strategies: buying five-year deep-discount bonds and buying five-year duration coupon bonds.

    • [PDF File]20 - Bond Duration and Convexity - Rutgers University

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      Coupon Zero Coupon Zero Zero Coupon Bond Duration and Convexity Introduction (Continued) Bond Duration and Convexity Introduction (Continued) Economics of Capital Markets Version 1.0 Outline Page 10 The sensitivity of a bond’s value to changing interest rates depends on both the length of time to maturity and on the pattern

    • [PDF File]Chapter 11 - Duration, Convexity and Immunization - University of Florida

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      Exercise 11-6:The current price of an annual coupon bond is 100. The derivative of the price of the bond with respect to the yield to maturity is -650. The yield to maturity is an effective rate of 7%. (a) Calculate the Macaulay duration of the bond. (b) Estimate the price of the bond using the approximation formula

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