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FINANCIAL MARKET COURSES

Duration & Convexity

For market participants that buy a bond, collect the coupon payments and hold the bond to maturity, market volatility is not a major concern (ignoring the possible reinvestment risk for their coupon payments); interest is received according to a predetermined rate and schedule, and the principal is returned at maturity. However, non-‘buy-and-hold’ investors that buy and sell bonds prior to maturity are exposed to many risks, most significantly interest rate volatility (bond prices and yields/interest rates are inversely related). Duration and convexity – the subject of this course – are important concepts used in measuring the price volatility of a bond, or its price sensitivity with respect to a change in its yield. Being aware of these concepts helps investors to protect themselves from bond price risk.

  • OBJECTIVES

    On completion of this course, you will be able to:

    Use the Taylor approximation formula to estimate the change in the price of a bond for a small change in yield

    Measure the price volatility of a bond using the concept of duration and modified duration

    Employ the properties of duration to construct a portfolio of bonds to immunize future obligations against interest rate risk

    Calculate the degree of non-linearity of the price-yield curve by means of the convexity equation

  • COURSE OUTLINE

    Topic 1: Taylor Approximation Formula

    Basics of Bonds

    Taylor Approximation Formula

    Topic 2: Duration

    What is Duration?

    Why is (Modified) Duration Important?

    Macaulay Duration

    Calculating Duration in Excel

    Modified Duration – Interest Rate Elasticity of a Bond

    Modified Duration in Excel

    Predicting the Price Change Using (Modified) Duration

    Topic 3: Convexity

    What is Convexity?

    Convexity vs. Duration

    Topic 4: Risk Immunization

    What is Immunization?

    Immunization Using a Portfolio of Bonds

    The Impact on Duration of Changes in Determinants

    The Impact on Duration of Changes in Coupon

    The Impact on Duration of Change in Maturity & Yield

  • PREREQUISITE KNOWLEDGE

  • ESTIMATED COMPLETED TIME

    90 Minutes

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