Evaluate the statement

CFA Level III
#1

Spread duration will be same as modified duration for all bonds except treasury.

#2

It should be.

Treasuries don’t have spreads, so even if they have a spread duration, its useless.

Other bonds are stupid: they cannot tell whether their price changes because their spread changes, or because the yield curve changes.

1 Like
#3

Thanks.

#4

Exception is floating rate bonds have lower mod dur than spread DUr?

#5

My pleasure.

#6

Floating rate bonds have a lower effective duration than modified duration, but their modified duration is the same as their spread duration.

Modified duration assumes that cash flows don’t change when yield changes, so modified duration doesn’t know that floaters are floaters.

#7

This I might have to check. Floaters are reset quite often, so their mod dur is small unlike their SD. But, I am not too sure.

#8

Modified duration assumes that the cash flows don’t change when yield changes. The reset doesn’t affect modified duration; it ignores possible future resets.

Trust me on this.

1 Like
#9

Thanks

#10

Thanks :slight_smile:

#11

My pleasure.