Fundamentals of Bonds
Hi you all,
I need to get something straight in my mind that has gone back and forward.
If I invest 100 million USD in a 30 Y bond, how much approximately do I need to invest in a 10 Y bond to have the same yield. That is giving me the same amount of money at year 30. We have to take the duration in account too.
Thankful for any help :)
Thank you in advance.
To have the same yield? You mean to have the same rate exposure? I don't really understand how a 10y bond can give you any money at year 30. To match duration, you need arnd 225MM of 10s.
Sorry if I wrote the question wrong, My teacher asked the question fast and I didn´t really get it. And yes you are correct by around 225 M of 10s. Could you explain it to me? Would be awesome :)
Not sure what you need explained. Duration is the sensitivity of an instrument to a move in rates. Just do the arithmetic (read some books) and you should arrive at a reasonable estimate yourself.
Sorry if I wrote the question wrong, My teacher asked the question fast and I didn´t really get it. And yes you are correct by around 225 M of 10s. Could you explain it to me? Would be awesome :)
He might also be asking what the breakeven rate would have to be in 10 years on a 20yr bond so he has the same amount of money after 30 years. I'm not sure he really knows what he's asking, though...
All you have to do is divide a 30-yr bond's duration by a 10-yr's duration and multiply that fraction by your $100mm face value.
Longer-dated bonds have a higher duration than shorter-dated ones, meaning their prices are more sensitive to changing in underlying rates. Intuitively this should make sense to you -- if rates go up, you'd be giving up more future interest payments on a 30yr bond than you would a 10yr bond. So you need to short many more 10yr bonds than you buy 30-yr bonds to offset this risk.
I'm not going to bother explaining duration itself as you should really be doing that work yourself.
No I understand duration. I seem to understand bot the question and the answer now. :)
I know that if rates go up, prices of bonds go down. So As you mentioned, the bond with higher duration(30 Y) is going to change in price much more than the bond with lower duration(10 Y). So If I hold a 30 Y bond I will be shorting many more 10 Y bonds because of the less price change to offset risk? I hope my jargong is right? Otherwise please tell me :)
Bond Basics (Originally Posted: 10/06/2011)
Found this article and thought I'd share it:
http://www.wallstreetwannabe.com/?page_id=599
PBnJ... stop spamming WSO to pump what apparently is your own website...
+1
Eos expedita voluptates voluptate cumque veritatis cumque voluptatem quis. Ducimus quas exercitationem esse voluptate libero. Voluptas temporibus dolorum natus nostrum dolor repudiandae illum. Consequatur non sit vel. Sed et sit iusto ratione. Eaque minus eum quis in consequatur.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...