Transcript FMCh25.ppt
Duration MGT 4850 Spring 2009 University of Lethbridge Interest Rate Term Structure • http://www.smartmoney.com/onebond/index.cfm?story=yieldcurve Bootstraping and Forward rates • Non-arbitrage in Interest rate futures • Trading the Yield curve • Trading Spreads The NOB Spread • The NOB spread is “notes over bonds” • Traders who use NOB spreads are speculating on shifts in the yield curve – If you feel the gap between long-term rates and short-term rates is going to narrow ( yield curve slope decreases or flattens), you could sell T-note futures contracts and buy T-bond futures NOB spread (trading the yield curve) slope increases (long term R increases more than short term or short term even decreases) buy notes sell bonds TED spread (different yield curves) • The TED spread is the difference between the price of the U.S. T-bill futures contract and the eurodollar futures contract, where both futures contracts have the same delivery month (T-bill yield<ED yield) – If you think the spread will widen, buy the spread (buy T-bill, sell ED) Trading Spreads Definition • Measure of the sensitivity of the price of a bond to changes in the interest rate at which bond is discounted • Macauley duration measure • Basic Duration Calculation Using Excel Formula • Settlement (purchase date) • Maturity (bond’s maturity date) • Coupon • Yield (to maturity) • Frequency (# coupons per year) • Basis (day count) 0 30/360 1 act/actual 2 act/360 3 act/365 4 Eur 30/360 Meaning of Duration • Weighted Average of the bond’s payments • Bond’s price elasticity with respect to its discount rate • Discount factor elasticity • Price volatility Babcock’s Formula • Weighted average of “current yield” and PVIF Duration Patterns • Maturity Duration Patterns • Coupon