Duration

CFA Level III Fixed Income
#1

Hi,

I am struggling with FI 2- Eoc # 14. I just do not understand it. Can anybody explain it to me?

THanks,

#2

Reading 22?

#3

yes

#4

(Modified or effective) duration measures the (negative of the) percentage change in the value of the portfolio for a 1% change in YTM.

When you have a levered portfolio, you calculate the percentage change in the value of the portfolio as the change divided by the equity in the portfolio, because that’s the change in the value of your investment. The change in value is $5,125,000 and the equity in the portfolio is $100,000,000, so the percentage change is $5,125,000 / $100,000,000 = 0.05125 = 5.125%. Hence, the duration is 5.125% / 1% = 5.125 years.

#5

Thanks magician-when you explain it that way- it’s so simple.

Thanks

#6

You’re quite welcome.

I like simple. I can do simple.