Duration question

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Edited 1 time(s). Last edit at Monday, June 9, 2008 at 12:59PM by neerajshokeen.
 
dashingdude Wrote:
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> Due to the pledge I will not post the actual
> question, but just to get a feel of the answer.
> There was a question on bond price change based on
> duration. There were few choices but I thought
> that the valid once were either 8% or -8%. I
> picked up -8%. Do you guys recall and was that
> right?
>
> Thanks,
> DD


Ans was 8% since it was a decrease in 200basis point with a duration of 4 and since there is already a negative sign in duration the net effect would be a positive sign
 
kenanadu Wrote:
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> Change in Price =-Dur * Change in Yield.


halfway there, read the rest of the thread and you will find the real equation
 
I took the -8 as well. I remember paying close attention to this question and I believe the yields ROSE by 200 bp.

http://ed.markovich.googlepages.com
 
But what about convexity?

I think that if there is a rise in i.r. then price decreases. by duration it should be -8% but the most correct should be less decrease than that, isn't?
 
I remember I got -8% and I'm 100% sure I am correct on that one. Yields went up by 200 basis points and had a duration of 4 was the question.
 
I had 4040/4141 set. Definitely the yield was decreasing and so the price would change by +8%
 
Test: 3030/3131

-8%...cause even if you include convexity and it increases, it would be a very small second order correction and it would still be closer to -8% than the other choices [I thought, and I hope this is correct]
 
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