March 2002
Intermediate to advanced
176 pages
3h 48m
English
book
Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition
by Jean Dermine, Youssef F. Bissada
Content preview from Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition
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Duration
For many years, specialists used the maturity of an asset as an indicator of interest rate risk. For example, the value of a 30-year fixed-rate bond will be more sensitive to interest rates than the value of a one-year-to-maturity bond. However, they have realized that maturity only provides information on the timing of the very last cash flow to come. It does not take into account the cash flows received earlier (such as interest payments). This is precisely what duration does. It is an average maturity that also takes into account the cash flows received in the early life of the asset.
Example10% coupon, three-year-to-maturity bond. Price is equal to 95.2 for an interest rate curve of 12%.
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