对外经济贸易大学投资学课件9.pptVIP

Rules for Convexity Rule 1 Holding maturity constant, a bond’s convexity is higher when the coupon rate is lower Rule 2 Holding the coupon rate constant, a bond’s convexity generally increases with its time to maturity Rule 3 Holding other factors constant, the convexity of a coupon bond is higher when the bond’s yield to maturity is lower Immunization of interest rate risk Net worth immunization Duration of assets = Duration of liabilities Net Present Value of asset=Net Present Value of Liability Assume interest can be reinvested at current interest rate Immunization of interest rate risk-example Suppose a firm has a single payment of $1,931 in 10 years, r=10%, if interest rate increase, the value of the firm’s asset will drop, the firm may not have enough fund to pay the obligation,how can the firm immunize from interest rate risk? Example (Cont’) PV of the liability (1931*(1+10%)-10) =745 Duration of single payment liability equal to time to maturity, 10 years To immunize, the firm search securities that have duration of 10 years and net present value no less than 745 A 20 year bond, par value $1,000, coupon rate 7%, has a duration of 10 years and NPV of 745, the firm purchase this bond to immunize interest rate risk of its liability Effect of Interest Rate changes on terminal values in year 10 Rates stay at 10% Rates fall to 4% Rates rise to 16% Accumulated value of interest payments received and reinvested 70*1.109 70*1.049 70*1.169 … … … 70*1 70*1 70*1 Total=1115 Total=842 Total=1492 Market value in the 10th year 816 1243 565 Grand total 1931 2085 2057 Total Liability 1931 1931 1931 1931 Net Surplus 0 154 126 Immunization and portfolio rebalance When interest rate fall, the value of your liability increase, however, the value of your asset also increase When interest rate increase, the value of your asset fall, however, the value of your liability also fall That is how immunization works Need dynamic rebalancing Lecture 9 Managing Bond Portfolio Inver