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Thread: how to approximate the change in present value due to a change in interest rate?

  1. #1
    Actuary.com - Level II Poster
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    how to approximate the change in present value due to a change in interest rate?

    how to use duration and convexity to approximate the change in present value due to a change in interest rate?

    and how does duration change as the interest rate changes?

  2. #2
    Actuary.com - Level IV Poster
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    %change in price is approx.

    -(change in y)ModD + [(change in y)^2]/2* Convexity

    This is a second order Taylor polynomial.

  3. #3
    Actuary.com - Level II Poster
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    thanks.

    how does the duration change as interest rate changes?

  4. #4
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    To see how duration changes with respect to a shift in the nominal rate. Create yourself an example and calculate duration with respect to different values of interest.

    You are better of seeing this for yourself as opposed to just having someone giving you an answer.

    Try it with this, for example:

    Say you have a 5 year bond, with annual coupon payments of 2, and a redemption value of 100 at t=5, and the bond was bought to yield 5% annual effective. Calculate ModD, for this. Then change i=5% to i=7% and i=3% for example, to see how your ModD will vary.
    Last edited by brandond; August 19th 2010 at 06:11 PM.

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