Bond Duration Questions

[Jiew Kwang]

Hi guys,

I've noticed Valuation Notes under page 70/146.

DV01 = Mac Duration * Price / 10000.

Should this read as DV01 = Mac Duration * Price / 10000 (1+y/k) as per the article: http://www.bionicturtle.com/how-to/article/dv01-market/

Another doubt i have would be when asked to calculate duration in a question, it means modified duration unless stated otherwise right? Thanks.

 

[David Harper CFA FRM]

HI Jiew,

Apologies, that is a mistake on p 70. DV01 with Mac Duration is as you show; i.e., DV01 is a more direct function of mod duration not mac duration

... Re: Another doubt i have would be when asked to calculate duration in a question, it means modified duration unless stated otherwise right?

Yes, i think your best default is the sensitivity metric modified duration. In practice, they seem to refer to unitless "duration" as mod duration and "years duration" as mac duration; e.g., "duration of 5" connotes modified and "duration of 5 years" must be interpreted as Macaulay. So, I would assume modified unless you see "years. "

David

 

[Jiew Kwang]

David,

Thanks for your prompt reply.

Anyway I posted the question in retrospect of attempting Qn 4.22b in John Hull's text, where it asked "what is the bond's duration?"

My calculations:
PV of Bond
@ 11% - 86.80
@12% - 85.58
@10% - 92.41
Modified Duration = 92.41-85.58/2*86.8*0.01=3.93

I checked the answers and it used the mac duration instead. So..

Mac Duration = 3.93 * 1.08 = 4.25yrs.

So i thought ur formula came in handy.. Thanks.