Durationssplit: Treasury-Kurve vs. Spread-Duration
What is spread duration of a bond?
Spread duration is the sensitivity of the price of a security to changes in its credit spread. The credit spread is the difference between the yield of a security and the yield of a benchmark rate, such as a cash interest rate or government bond yield.
How is credit spread duration calculated?
It is calculated by simply multiplying two readily available bond characteristics: the spread-durations and the credit spread. The result is a single number that can be used to compare credit risk across a wide range of bonds.
What is 10 2 year Treasury yield spread?
The 10-2 Treasury Yield Spread is the difference between the 10 year treasury rate and the 2 year treasury rate. A 10-2 treasury spread that approaches 0 signifies a „flattening“ yield curve. A negative 10-2 yield spread has historically been viewed as a precursor to a recessionary period.
What are the limitations of using duration as a measure of a bond’s price sensitivity to interest rate changes?
What are the limitations of using duration as a measure of a bond’s price sensitivity to interest-rate changes? The main limitation is that the larger the rate change the less accurate the estimated price change. This is due to the convexity error. You just studied 8 terms!
Do Treasuries have spread duration?
The bond spread duration of a 10-year Treasury bond equals 0. Corporate bonds with low spread durations of 1, for instance, represent comparatively low interest rate risk. Bonds with higher spread durations, of 3, for example, represent greater interest rate risk.
What is spread widening?
The direction of the yield spread can increase, or “widen,” which means that the yield difference between two bonds or sectors is increasing. When spreads narrow, it means the yield difference is decreasing.
How do you calculate treasury spread?
Subtract the lower interest rate from the higher interest rate. That will be the bond spread. This measurement is also called the yield spread. Yield spread can also be calculated between other debt securities, such as certificates of deposit.
What happens when credit spreads widen?
Credit spreads are widening, increasing the gap between interest rates on corporate bonds and risk-free government bonds. That happens when bond investors demand a higher yield on corporate bonds as compensation for increasing risk that a company cannot repay its debts.
What is credit spread curve?
A credit spread is the difference in yield between a U.S. Treasury bond and another debt security of the same maturity but different credit quality. Credit spreads between U.S. Treasuries and other bond issuances are measured in basis points, with a 1% difference in yield equal to a spread of 100 basis points.
What is the difference between maturity and duration?
In plain English, “duration” means “length of time” while “maturity” denotes “the extent to which something is full grown.” When bond investors talk about duration it has a very specific meaning: The sensitivity of a bond’s price to changes in interest rates.
What is bond duration vs maturity?
Duration and maturity are key concepts that apply to bond investments. Effective duration and average maturity apply if you have a portfolio consisting of several bonds. While maturity refers to when a bond expires, or matures, duration is a measure of the bond’s price sensitivity to changes in interest rates.
Is Higher bond duration better?
In general, the higher the duration, the more a bond’s price will drop as interest rates rise (and the greater the interest rate risk). For example, if rates were to rise 1%, a bond or bond fund with a five-year average duration would likely lose approximately 5% of its value.
Why is Bond duration less than maturity?
The duration of any bond that pays a coupon will be less than its maturity, because some amount of coupon payments will be received before the maturity date. The lower a bond’s coupon, the longer its duration, because proportionately less payment is received before final maturity.
Why is Bond duration important?
Bond duration is a way of measuring how much bond prices are likely to change if and when interest rates move. In more technical terms, bond duration is measurement of interest rate risk. Understanding bond duration can help investors determine how bonds fit in to a broader investment portfolio.
Is duration always less than maturity?
When a coupon is added to the bond, however, the bond’s duration number will always be less than the maturity date. The larger the coupon, the shorter the duration number becomes. Generally, bonds with long maturities and low coupons have the longest durations.
What is duration spread?
Duration Times Spread (DTS) is the market standard method for measuring the credit volatility of a corporate bond. It is calculated by simply multiplying two readily available bond characteristics: the spread-durations and the credit spread.
Does duration increase with time to maturity?
Duration is inversely related to the bond’s yield to maturity (YTM). Duration can increase or decrease given an increase in the time to maturity (but it usually increases).
What is the difference between duration and modified duration?
Duration or Macaulay Duration refers to measurement of weighted average time before having the cash flow, while Modified Duration is more on the percentage change in price in terms of yields.
Why is modified duration better than maturity?
While maturity may give some information about the interest rate risk, modified duration provides a better idea including the potential impact on price of the bond for a given change in interest rate.
What does Modified duration tell us?
Modified duration is a formula that expresses the measurable change in the value of a security in response to a change in interest rates. Modified duration follows the concept that interest rates and bond prices move in opposite directions.
What is the difference between DV01 and PV01?
PV01, also known as the basis point value (BPV), specifies how much the price of an instrument changes if the interest rate changes by 1 basis point (0.01%). DV01 is the dollar value of one basis point change in the instrument.
What is CS01 and DV01?
DV01 being the risk of the risk-free/benchmark rate moving 1bp, and CS01 being the risk of the credit spread over the benchmark rate moving by 1bp. For a plain old bond these risks should be the same, but for some derivatives they can be different.
Is DV01 same as BPV?
Basis Point Value, also known as DV01 (the dollar value of a one basis point move) represents the change in the value of an asset due to a 0.01% change in the yield. BPV or DV01 calculations are used in many ways, but primarily to show the dollar amount of change for each increase or decrease in interest rates.
Is Delta same as DV01?
DV01 is the profit or loss of a portfolio from a one basis point change in interest rates, It is the parallel shift in the yield curve, while IR Delta usually means shifting the curve by bumping by 1 bps at each tenor.
Why is Macaulay duration important?
Macaulay duration tells the weighted average time that a bond needs to be held so that the total present value of the cash flows received is equal to the current market price paid for the bond. It is often used in bond immunization strategies.
What is DV01 of a swap?
DV01= „Dollar value of a basis point“ refers to the exposure of a swap position to a move of 1 bps in the forward rate curve.