Duration

CFA Level II Fixed Income
#1

Hi all,

i have a quick question:

when we calculate the duration of a bond portfolio do we shock the yield curve (I.e the YTMs) or do we shock the spot curve (ie the individual spot rates)?

Thanks

#2

You’re shocking the par (YTM) curve.

#3

Thanks S20000 But why do we shock the YTM and not the spot curve. At the end of the day the spot curve does reflect the yields on Zbonds. So why the YTM and not the Spot curve. The only explanation I can think of is that the Par YTM curve reflects all potential bonds (ie coupon baring bonds) while the spot curve only reflect the Zbonds. Is this understanding correct? Thanks

#4

You give me too much credit: it’s only 2000, not 20000.

Modified (and effective) duration is defined as the (negative of) percentage change in price for a 1% change in YTM. We shock the YTM because the definition says shock the YTM.

If you wanted to compute the percentage change in price for a 1% parallel shift in the spot curve, you could, but the resulting number will be (slightly) different from the (modified or effective) duration.

My pleasure.