VRM 12. Duration, Convexity and DV01: LOs

a) Describe a one-factor interest rate model and identify common examples of interest rate factors.

b) Define and compute the DV01 of a fixed income security given a change in yield and the resulting change in price.

c) Calculate the face amount of bonds required to hedge an option position given the DV01 of each.

d) Define, compute, and interpret the effective duration of a fixed income security given a change in yield and the resulting change in price.

e) Compare and contrast DV01 and effective duration as measures of price sensitivity.

f) Define, compute, and interpret the convexity of a fixed income security given a change in yield and the resulting change in price.

g) Explain the process of calculating the effective duration and convexity of a portfolio of fixed income securities.

h) Describe an example of hedging based on effective duration and convexity.

i) Construct a barbell portfolio to match the cost and duration of a given bullet investment and explain the advantages and disadvantages of bullet versus barbell portfolios.