金融风险--Duration model（PPT 38）

2.4 Duration model
Introduction
Reflection on the Shortcoming of Maturity model: Ignoring coupon effect
Maturity model tries to take advantage of the maturity effect on bond value and  use its maturity as an indicator of its interest rate sensitivity.
But strictly speaking, it is a good case only when the  bond generates no coupon, i.e., it is a zero coupon bond.
Coupon effect is ignored in maturity model.
More bonds pay coupons, and coupon effect must be taken into account.

Shortcoming of Maturity model: Ignoring coupon effect
Bonds with identical maturities but different coupon payments responds differently to interest rate changes. Coupon effect does exist.
With higher coupons, more of the bond’s value is generated by cash flows which take place sooner in time. Consequently, less sensitive to changes in R.
So, maturity can not serve well as an accurate measure of interest rate sensitivity of coupon bonds.

 

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