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Duration

Duration. MGT 4850 Spring 2007 University of Lethbridge. Interest Rate Term Structure. http://www.smartmoney.com/onebond/index.cfm?story=yieldcurve. Bootstraping and Forward rates . Non-arbitrage in Interest rate futures Trading the Yield curve Trading Spreads. The NOB Spread.

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Duration

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  1. Duration MGT 4850 Spring 2007 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 yield<ED 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 (bond’s 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 bond’s payments • Bond’s price elasticity with respect to its discount rate • Discount factor elasticity • Price volatility

  11. Babcock’s Formula • Weighted average of “current yield” and PVIF

  12. Duration Patterns • Maturity

  13. Duration Patterns • Coupon

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