Dear all,
I am attempting to do Finquiz questions
It says ‘For a portfolio of non-treasury securities, spread durationn equals portfolio duration’.
My understanding is duration includes risk free rate + spread for that bond
Whereas spread duration just includes the spread for that bond and not therisk free rate.
Can anyone please explain where I am missing.
Thank you
The portfolio’s (modified or effective) duration is the percentage change in the portfolio’s price when yields change by 1%.
The spread duration is the percentage change in the portfolio’s price when spreads change by 1%.
If there are no Treasury securities, then the portfolio cannot tell whether the YTM on each of its bonds changed by 1% because Treasury yields increased by 1%, or because spreads widened by 1% while Treasury yields remained unchanged; either way, the YTM increases by 1%. Thus, portfolio (modified or effective) duration equals spread duration.
(Note that this may not be true for some bonds with embedded options. Spreads widening by 100bp won’t affect prepayments on MBSs, but Treasury yields increasing by 100bp very well might.)
s2000magician,
I am going to get a little emotional.
Life is sometime very unfair, but beauty lies in taking the challenge to overcome it.
I realise how much I have lost by realizing very late in the day of the value of this forum. I wish I would have known about this forum much earlier.
Thumbs up to you/everyone in this forum for everything.
Thank you
Wowzer!
You’re quite welcome.