O'Reilly logo

Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques by WILLIAM S. BERLINER, ANAND K. BHATTACHARYA, FRANK J. FABOZZI

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

YIELD CURVE RISK

As discussed previously, duration and convexity are measures of what is called level risk if the yield curve shifts in a parallel fashion. That is, if all Treasury rates shifted up or down by the same number of basis points, these measures do a good job of approximating the exposure of a security or portfolio to a change in the level of rates. However, yield curves cannot be expected to change in a parallel fashion. Consequently, two MBS portfolios with the same duration can perform quite differently when the yield curve shifts in a nonparallel fashion.
EXHIBIT 11.3 Illustration of Price Effects: Convexity versus Spread Widening
138
Several approaches have been suggested for measuring the exposure to a shift in the yield curve. A popular approach for measuring yield curve risk is to change the yield for a particular maturity of the yield curve and determine the sensitivity of a CMO or portfolio to this change, holding all other yields constant. The sensitivity of the change in value to a particular change in the yield is called rate duration. There is a rate duration associated with every point on the yield curve. Consequently, every bond has a profile of rate durations representing each maturity on the yield curve.
The most commonly used approach, first proposed by Thomas Ho,28 focuses on a series of key maturities on the spot rate curve. The durations for ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required