Mock Exam B- Q12
- Thread starter vkichoi
- Start date
Hi vkichoi (source is here, per the link at the end of the answer: https://forum.bionicturtle.com/threads/p1-t4-28-value-at-risk-var.5669 )
Strictly, you want modified duration. The zero-coupon bond with 3.0 years to maturity has a Macaulay duration of 3.0 years; i.e., Mac duration is the weighted average maturity of the bond.
Modified duration is the prevalently useful risk sensitivity; here it is multiplied by a yield shock to estimate a price/value VaR, so we do want a modified duration, as in:
[naive linear] estimate of price change in % ~= [modified duration] * [yield change]
As mod duration = mac duration/(1+y/k), they are close to each other (and, under continuous compounding where k = inf, they are identical), so it's often not deadly to mix them up. Unless you look at an old sample paper, the FRM knows to distinguish. Thanks,
Strictly, you want modified duration. The zero-coupon bond with 3.0 years to maturity has a Macaulay duration of 3.0 years; i.e., Mac duration is the weighted average maturity of the bond.
Modified duration is the prevalently useful risk sensitivity; here it is multiplied by a yield shock to estimate a price/value VaR, so we do want a modified duration, as in:
[naive linear] estimate of price change in % ~= [modified duration] * [yield change]
As mod duration = mac duration/(1+y/k), they are close to each other (and, under continuous compounding where k = inf, they are identical), so it's often not deadly to mix them up. Unless you look at an old sample paper, the FRM knows to distinguish. Thanks,
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