Duration

1
Duration

• MGT 4850
• Spring 2009
• University of Lethbridge

2
Interest Rate Term Structure

• http//www.smartmoney.com/onebond/index.cfm?story
  yieldcurve

3
Bootstraping and Forward rates

• Non-arbitrage in Interest rate futures
• Trading the Yield curve
• Trading Spreads

4
The NOB Spread

• The NOB spread is notes over bonds
• Traders who use NOB spreads are speculating on
  shifts in the yield curve
• If you feel the gap between long-term rates and
  short-term rates is going to narrow ( yield curve
  slope decreases or flattens), you could sell
  T-note futures contracts and buy T-bond futures

5
NOB spread (trading the yield curve)

• slope increases (long term R increases more than
  short term or short term even decreases) buy
  notes sell bonds

6
TED spread (different yield curves)

• The TED spread is the difference between the
  price of the U.S. T-bill futures contract and the
  eurodollar futures contract, where both futures
  contracts have the same delivery month (T-bill
  yieldltED yield)
• If you think the spread will widen, buy the
  spread (buy T-bill, sell ED)

7
Trading Spreads
8
Definition

• Measure of the sensitivity of the price of a bond
  to changes in the interest rate at which bond is
  discounted
• Macauley duration measure
• Basic Duration Calculation

9
Using Excel Formula

• Settlement (purchase date)
• Maturity (bonds maturity date)
• Coupon
• Yield (to maturity)
• Frequency ( coupons per year)
• Basis (day count)
• 0 30/360
• 1 act/actual
• 2 act/360
• 3 act/365
• 4 Eur 30/360

10
Meaning of Duration

• Weighted Average of the bonds payments
• Bonds price elasticity with respect to its
  discount rate
• Discount factor elasticity
• Price volatility

11
Babcocks Formula

• Weighted average of current yield and PVIF

12
Duration Patterns

• Maturity

13
Duration Patterns

• Coupon