Yield Curve Strategies - Why do we use effective duration while calculating returns in Yield Curve Strategies?

CFA Level III Fixed Income
#1

Hi guys,

In the Yield Curve Strategies chapter in fixed income we seem to be using the effective duration in order to calculate the change in price due to investor expectations calculation. This can be seen in Example 7 - Components of Expected Return.

However in the previous chapter we were using modified duration the formula why are we suddenly using effective duration here?

#2

If the bond has options, use ED. For a fixed rate non option bond, they should be the same

#3

Example 7 of this chapter does not mention any options in the portfolio yet they are choosing to use effective duration.
Any idea why

Anyway I assume that if they have mentioned effective duration it is implied that the portfolio does have options. Would that be correct?

#4

There’s only one reason you wouldn’t use effective duration.

That would be if they don’t give it to you.

2 Likes