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Chapter 11 Managing Fixed Income Investments
Rules Restated for Duration
1. Duration (zero) = time to maturity
2. Duration increases when coupon rate is lower
3. Duration generally increases with maturity (always at par or a premium)
4. Duration increases when YTM is lower
5. Duration (perpetuity) = (1 + y)/y
Immunization
1. Bank Example
2. Pension Fund Example
Duration matched assets and liabilities ensure the asset portfolio meets the firm's obligations despite changes in interest rates.
How?
Price risk vs...