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Tim Hortons
04-13-2002, 01:41 PM
When we're calculation effective duration, are we shifting the YTM YC by a parallel shift or the Spot Rate YC? To then value the security, do we use spot rates or YTM? I think it's spot rates to find the fair value derived from the new shifted Yield to maturity YC, but every example that I've seen so far has been the YTM to discount every cash flow.
One more question: On page E-21 in Jam, the measure of immunization risk says to discount the asset cash flows using the Yield to maturity, but it then says on the next page that the best way to discount the liabilities is the spot rates. I think this would give inconsistent results. HELP!!!

Exam Slave
04-15-2002, 01:14 PM
To price, use spot rates. If you don't, then I will and take advantage of you. In ways I can't describe here.

To calculate any kind of duration, use YTM.

NOTE: in order to determine YTM, you'll need the price.

Tim Hortons
04-15-2002, 01:48 PM
To price, use spot rates. If you don't, then I will and take advantage of you. In ways I can't describe here.

hmmmm... who's the slave here?

So, even if I have a portfolio full of bonds, I find one YTM based on the price &amp; cash flows, then give'er a shift and calculate the Mod Dur (if no interest sensitive CFs).

For effective duration are we shifting the YTM, finding the new spot rates, then the forward rates then the short rates, then pricing the bond (considering the interest sensitive cashflows) to get V+ and V- (i think i'm falling back into the other thread's line of question).

Exam Slave
04-15-2002, 02:37 PM
Clarification:
Mac and Mod durations use YTM.
Effective duration uses prices. Prices require spot rates.

JAM Section E discusses this.
Approximation steps:
1. Re-project interest rates after shifting yield curve (spot rate curve?) down by delta-y points.
2. Calculate new price = V_.
etc.