1Ŧ lnLroducLlon

2Ŧ lmplemenLaLlon MeLhod


3Ŧ 8esulLs and concluslon deLalllng your analysls

4Ŧ Compare and conLrasL Lhe duraLlons of Lhe bonds compuLed uslng Lhe booLsLrap meLhod Lo
Lhose calculaLed uslng Lhe nelson Slegel meLhodŦ



1Ŧ IN1kCDUC1ICN (rom 1exL 8ook)
1he duraLlon of a securlLy wlLh prlce l ls Lhe (negaLlve of Lhe) petceot seosltlvlty of Lhe prlce l Lo a
smoll parallel sblft ln Lhe level of lnLeresL raLesŦ 1haL lsţ leL r(Lţ1) betbe cootlooosly compoooJeJ tetm
sttoctote of lotetest totes ot tlme tŦ Conslder a unlform shlfL of slze dr across raLes LhaL brlngs raLes
Lo r'(Lţ1)ţ glven by

r(Lţ1) r'(Lţ1) ƹ r(Lţ1) + dr
LeL Lhe prlce of Lhe securlLy move by dÞ as a consequence of Lh shlfLť
Þ Þ' ƹ Þ + dÞ

1he duraLlon of Lhe asseL ls Lhen deflned by as

ototlooƹ
p
ƹ Ŵ dÞ/ÞŦdr

1he shlfL Jt ls a small unlform change across maLurlLlesţ such as for lnsLance 1 basls polnL (Ŧ01Ʒ)Ŧ 1he
noLlon of duraLlon Lhen measures Lhe lmpacL LhaL such a unlform change on yleld curve has on Lhe
prlce of securlLy lŦ




Ŧ Imp|ementat|on methodo|ogy

a) a 10Ŵyear coupon bond w|th a ñxed annua| coupon
rom Lhe prevlously calculaLed dlscounL facLors Lhe Þv of Lhe cash flows (coupon paymenLs) ls
deLermlned flrsLŦ SubsequenLly Lhe welghL of each cash flow ls found ouL of Lhe LoLal Þv of Lhe bondŦ
1hese welghLs are Lhen mulLlplled wlLh Lhelr respecLlve perlodsŦ 1he sum of Lhese welghLed paymenL
Llmes glve Lhe duraLlon of Lhe bondŦ
b) a 10Ŵyear |nverse ßoat|ng rate bond w|th a reference rate of 1Ʒ
1he duraLlon of an lnverse floaLlng raLe bond ls calculaLed by addlng LogeLher Lhe respecLlve
welghLed duraLlons of a zero coupon bond Ǝ a coupon bond and subLracLlng a welghLed duraLlon of
a floaLlng raLe bond wlLh same Llme maLurlLyŦ
1he duraLlon of a coupon bond ls found ouL by followlng Lhe above meLhodology descrlbed ln (a)
and Lhe duraLlon of zero coupon bond ls Lhe Llme Lo maLurlLyŦ
Slnce Lhe exŴcoupon prlce of a floaLlng raLe bond on any coupon daLe ls equal Lo Lhe bond par valueţ
Lhe value of Lhe floaLlng raLe bond wlll be 100 aL any reseL daLeŦ 1hus Lhe welghLed Llme duraLlon
wlll be 0Ŧ3Ŧ


3Ŧ kesu|ts

Cn followlng Lhe above menLloned meLhodology Lhe duraLlon for a 10Ŵyear coupon bond wlLh a
ñxed annual coupon of 12Ʒ (LhaL ls pald semlŴannually) uslng Lhe booLsLrapped and Lhe nS yleld
curves ls 6Ŧ72 and 6Ŧ71 respecLlvelyŦ

And for a 10Ŵyear lnverse ßoaLlng raLe bond wlLh a reference raLe of 12Ʒ uslng Lhe booLsLrapped
and Lhe nS yleld curves ls 14Ŧ64 and 14Ŧ67 respecLlvelyŦ






Ŧ Interpretat|on
1he duraLlon a 10Ŵyear coupon bond ls 6Ŧ72 Ǝ 6Ŧ71 for Lhe booLsLrapped and Lhe nS yleld curve
respecLlvelyŦ Whlch ls lesser as compared Lo a zero coupon bond wlLh same Llme Lo maLurlLyŦ 1hus
Lhls bond ls less senslLlve Lo lnLeresL raLe changes as compared Lo a zero coupon bondŦ

Whlle Lhe duraLlon of a floaLlng raLe bond ls 14Ŧ64 and 14Ŧ67 for Lhe booLsLrapped and Lhe nS yleld
curve respecLlvelyŦ 1hls exceeds Lhe duraLlon of Lhe underlylng flxed coupon bondsyŦ 1hus Lhls bond
ls more senslLlve Lo lnLeresL raLe changes as compared Lo a zero coupon bond as well as a coupon
paylng bondŦ

Ŧ Conc|us|on

1he duraLlon lllusLraLes Lhe rlsk embedded ln flxed lncome securlLlesŦ SLrucLured securlLles
such as lnverse floaLers conLaln addlLlonal rlsks LhaL Lhe rlsk manager should be aware ofŦ
or lnsLance a porLfollo conLalnlng Coupon paylng bondsţ Zero coupon bonds and lnverse
floaLlng raLe bonds Lhe lnLerpreLaLlon of duraLlon as Lhe welghLed average of cash flow
paymenLs could be mlsleadlng as Lhls porLfollo sLlll has a large senslLlvlLy Lo lnLeresL raLesţ
hence lL ls very rlskyŦ




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