Fixed Income Analysis by Barbara S. Petitt; & Donald J. Smith

Author:Barbara S. Petitt; & Donald J. Smith
Language: eng
Format: epub
ISBN: 9781119628132
Publisher: John Wiley & Sons, Inc. (trade)
Published: 2019-09-16T00:00:00+00:00

Total 2-Year 3-Year 5-Year 10-Year 30-Year

2 83.89

9.24

–0.03

–0.14

–0.38

8.98

0.81

4 105.97

12.44

0.00

–0.01

–0.05

4.53

7.97

6 136.44

14.75

0.01

0.03

0.08

2.27

12.37

8 169.96

14.90

0.01

0.06

0.16

2.12

12.56

10 204.38

14.65

0.02

0.07

0.21

2.39

11.96

Exhibit 25 Key Rate Durations of 30-Year Bonds Putable in 10 Years Valued at a 4% Flat Yield Curve with 15% Interest Rate Volatility

If the 30-year bond putable in 10 years has a high coupon, its price is more sensitive to the 30-year rate because it is unlikely to be put and thus behaves like an otherwise identical option-free bond. The 10% putable bond (the last row of Exhibit 25), for example, is most sensitive to changes in the 30-year rate, as illustrated by a 30-year key rate duration of 11.96. At the other extreme, a low-coupon bond is most sensitive to movements in the 10-year rate. It is almost certain to be put and so behaves like an option-free bond maturing on the put date.

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