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Rob's s1452 Notes

✏️ Duration and Interest Rate Risk Practice

✏️ Which of the following bonds has the highest interest rate risk? They have the same YTM.

  1. 8 year bond with c=8%
  2. 12 year bond with c=6%
  3. 8 year bond with c=6%
  4. 12 year bond with c=8%
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B.
B has a higher duration than A because it has a lower coupon rate and a higher maturity.
B has a higher duration than C because it has a higher maturity.
B has a higher duration than D because it has lower coupon rate.  ✅

6 Principles of Interest Rate Sensitivity 5 Rules of Duration
  1. Prices and yields are inversely related
  2. Convexity: increases in yields have a smaller effect than a decrease of equal magnitude
  3. Long-term bonds tend to be more price sensitive than short
  4. As maturity increases, price sensitivity increases at a decreasing rate
  5. Interest rate risk is inversely related to c
  6. Price sensitivity is inversely related to YTM
  1. Duration for zero coupon bonds = maturity
  2. Duration & Coupons are inversely related
  3. Duration increases with maturity
  4. Duration & Yields are inversely related
  5. Duration for perpetuity = (1+y)/y

✏️ Which of the following bonds has the highest interest rate risk?

  1. 12 year bond with YTM=8%, c=8%
  2. 12 year bond with YTM=8%, c=6%
  3. 12 year bond with YTM=5%, c=6%
  4. 12 year bond with YTM=12%, c=6%
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C.
C has a higher duration than A because it has a lower coupon rate and a lower YTM.
C has a higher duration than B because it has a lower YTM.
C has a higher duration than D because it has a lower YTM.  ✅