Negative Key Rate Duration

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psahni

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HI
Can someone please tell me that - “by saying negative key rate duration, it actually means positive relationship between Bond Price and key rates”. I was going through the last reading of Fixed Income and got confused with this. thankyou guys !!!
 
when rates fall - duration falls, when rates rise - duration rises.
that is negative convexity on the bond - and that is a positive relationship for you. both rates and the duration move in the same direction together.
 
cpk - Doesn’t your duration increases when rates fall? I am confused now.
 
for a negative convex bond this above relation is what is true.
for a positive convex bond - your rates rise - duration falls, when rates fall - duration rises.
I am trying to confuse nobody.
 
@cpk123

I agree with your statements. Just confirm me one more thing - Can we say “Non callable bonds have +ve duration (all rates) and Interest Only strips has -ve duration (long term rates)” or should we say it other way round.
 
@1BigStudMuffin
For an MBS security, when Interest rates decreases, Prepayment increases which leads to reduction in duration.
 
Maybe better to think convexity for positive and
concavity for negative?
 
I think we are confusing ourselves. @Psahni, does the question relates to MBS? As this is a amortizing bond with prepayment option it will behave differently from a normal option free bond ? So how does the sentence fit in the context?
 
I think we are confusing ourselves. @Psahni, does the question relates to MBS? As this is a amortizing bond with prepayment option it will behave differently from a normal option free bond ? So how does the sentence fit in the context?
 
psahni wrote:HI
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Hello.
psahni wrote:Can someone please tell me that - “by saying negative key rate duration, it actually means positive relationship between Bond Price and key rates”. I was going through the last reading of Fixed Income and got confused with this.
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The normal situation for a bond is that the price falls when interest rates rise, and vice-versa; this corresponds to a positive duration (Macaulay, modified, effective, key rate, whatever). If a bond’s price rises when interest rates rise and falls when interest rates fall, that corresponds to a negative (effective, or key rate) duration. (Macaulay duration and modified duration cannot be negative.) The common example of this is an IO strip in a CMO when interest rates are low: such a bond has a negative effective duration.
So, a negative key rate duration means that when that key rate rises the bond’s price rises, and when that key rate falls the bond’s price falls: a positive relationship between the bond price and the key rate.
psahni wrote:thankyou guys !!!
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My pleasure.
 
@S2000magician: You understood my query more than I could and you not only resolved it perfectly but also provided me added info that Macaulay and modified duration can’t be negative. Please find below a dedicated thanks for you.
thankyou S2000magician !!! :)
 
psahni wrote:@S2000magician: You understood my query more than I could and you not only resolved it perfectly but also provided me added info that Macaulay and modified duration can’t be negative. Please find below a dedicated thanks for you.
thankyou S2000magician !!! :)
Click to expand...
My pleasure.
Best of luck on the exam!
 
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