Topic 5 Notes

[Manish Vij]

Hi David,

I am a little confused on a few Duration notations in the Topic 5 notes and wanted to clarify the following:

Page 21: In the formula for DV01 what is being referred to as "t" (in lowercase) and what is "T" (in uppercase)? Got a little confused here, and want to ensure that I am understanding the formula correctly.

Page 22: In the 1st formula for Macaulay duration, what does the "k" in the denominator refer to? Want to be sure.

Thanks in advance for clarifying.

Regards,

Manish Vij

 

[David Harper CFA FRM]

HI Manish,

This is a summary of Tuckman, such that:

• 21: capital T is the bond’s maturity; small (t) is sequences up to (T) in the summation: 0.5, 1.0, 1.5 …
• 22: k = number of periods/year. For s.a. bonds, as in Tuckman, coupons pay twice per year, so (k) = 2. For annual bonds, k = 1, for continuous compounding, k = infinite. Tuckman consistently assumes semi-annual (k=2). I hope that helps, thanks,