Date of Publication

2017

Document Type

Master's Thesis

Degree Name

Master of Science in Financial Engineering

Subject Categories

Finance and Financial Management

College

Ramon V. Del Rosario College of Business

Department/Unit

Financial Management

Thesis Adviser

Angelito A. Bala

Abstract/Summary

Duration is widely used by financial analysts as a measure of sensitivity of bonds to changes in interest rate. It is commonly used by fund managers to substitute interest rate risk of their assets and liabilities. A number of fixed income sensitivity indicators, including the price value of a basis point (PV01) and the yield value of a price change are established within the duration framework (Fabozzi, 2005; Hillier et al. 2011). Furthermore, the simplicity and intuitive interpretation of duration has made it a popular interest management tool for treasury managers for bond analysis, investment strategies and portfolio management. However, it is well known that the convexity of the price-yield relationship introduces approximation errors that grow as changes in yield increases..

In this study, the proponent proposed a new approach to measure interest rate sensitivity of bonds, which significantly improved the accuracy of the Traditional Duration method and achieved a level of precision close to the other existing approaches such as Traditional Duration plus Convexity, Exponential Duration and Discrete Duration. The study also showed through simulations and stress testing that the proposed method outperformed other methodologies proposed in previous literature.

Abstract Format

html

Language

English

Format

Electronic

Accession Number

CDTG007544

Shelf Location

Archives, The Learning Commons, 12F Henry Sy Sr. Hall

Keywords

Bonds--Philippines; Interest rates--Philippines

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