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Thanks for the video, it made it very clear how the math works. However, I'm unclear on why someone would go thru the effort to calculate new Bond Price when interest rates change using the Macaulay/Convexity method. Why isn't it sufficient to just use the PV function in Excel to find the new Bond Price as interest rates change? This would be your Column C in the table beginning on row23. Your Column D is the Bond Price as a result of using the Macaulay/Convexity method, and it is close to Column C. I believe your explaining that the slight difference between Col C and Col D is due to the fact that Convexity changes depending on the interest rate.
You're right, I was using that as an example to show convexity changes at different interest rates for a particular bond. It would be easier to calculate with the PV function, this was a bit more of a thought experiment than anything else
I don't currently have a video on that topic yet, but I appreciate the suggestion and will consider exploring it in a future video. Positive convexity in bonds means that the bond's duration increases as interest rates fall, typically leading to larger price increases and smaller price decreases. Negative convexity, on the other hand, occurs when a bond's duration decreases as interest rates fall, often seen in bonds with features like prepayment options, resulting in limited price appreciation and greater price sensitivity to rising rates.
Hey! What a great video, it has been very useful! I just have one quick question, why when you calculated the estimated bond price using duration, you used MacDuration instead of Modified Duration. I though that MacD is the weighted average time it takes to get all the cashflows and Modified Duration is the % change that the bond price will have by 1% change in YieldToMat, if you can help me to clarify this, I will appreciate it, thanks!
You are correct Sebastian! Modified Duration is more appropriate for estimating changes in bond prices based on changes in interest rates. I have a video here that breaks down the different duration metrics in detail here: ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-2tXjJR1W0YU.html
You are correct that modified duration is more appropriate to use for measuring changes in bond prices based on changes in interest rates. I go into detail on the differences between the two (as well as effective duration here: ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-2tXjJR1W0YU.html
I have a doubt regarding the formula for the duration implied price and duration + convexity implied price for YTM larger than 5%. Why in one we use the 5% (base) minus 5.01% and in the other use the 5.01% minus the 5% (base)? Because my numbers only matched yours with this difference in formulas, when they should be the same I guess.
The interpretation can be used for both but you are right that you will see that interpretation used more often with the modified duration. I have a video breaking down Macaulay duration, modified duration, and effective duration here: ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-MzJihqG2DEA.html
I don't know if I did this right but the dollar convexity and convexity from YTM of 4.99 and 5.01 is giving me 146710.09 for $ Conv/1588.6 for Conv. and 3649.68 for $Conv/39.58 for Conv? What is the reason for this.
This seems a bit high to me but it is hard for me to tell where you may have gone wrong based on this comment alone. You may need to walk back through each step exactly to make sure nothing has been missed or skipped
Bloomberg has much lower convexity numbers than using the methodology I've found in text books. You can ask Bloomberg helpdesk for the methodology by which they calculate convexity to see if you can back engineer how they calculate it
Would you recommend cfa or FRM or mba for senior folks in risk management who are looking to ipskill outside of their primary domains (eg: operational risk).
Hey! If you are looking to upskill outside of your primary domain then I would say probably CFA or MBA. I would lean CFA if you want to work in more technical financial analysis roles or MBA if you want to push for middle management. In my opinion the CFA has more prestige than almost all MBA programs though
Thank you! DV01 is the synonymous with Dollar Duration which I discuss in this video @4:45 I may make a DV01 specific video in the future but that won't be for a while as I have a large backlog
Hey! It depends on your situation and preferences. I addressed this question exactly in this video here: ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-nJ-PNKbIMD8.html