Duration

[wadswort]

Hi guys,

I've noticed that the following formula estimates the duration of a security:

((dv01 * par value)/(market value))*100.

I am not understanding the equation.

First, dv01 is the change in value(dollars) to a change in yield (usually 1bp). How does it make sense to multiply par with this? It is dollars times dollars. What does this tell me?

If someone could walk me through this equation it would be great.

Thanks.

 

[aaronhotchner]

A couple things:
What is a par multiplier?
If dv01 is defined as "change in value as a result of a 1 bp change in yield," then dv01 is the duration (multiplied by the current price), by definition.

 

[quotes]

(MD=\frac{\Delta P/P}{\Delta r})

Check the detailed formula with this. If it does not fit, it is wrong.

 

[wadswort]

A couple things:
What is a par multiplier?
If dv01 is defined as "change in value as a result of a 1 bp change in yield," then dv01 is the duration (multiplied by the current price), by definition.

Assume it's 1.

So, if it is duration, then we should be able to multiply it wit par to get the change in value when rates move. But that's the thing. Dv01 is NOT a percentage. Its change in value expressed in dollars. It doesn't make sense to multiply dollars with dollars....does it?

 

[quotes]

Assume it's 1.

Dv01 is NOT a percentage. Its change in value expressed in dollars.

No it is not change in value expressed in dollars.

 

[aaronhotchner]

^ what he said.

The point is, if you know the change in the bond's price, and you know the change in the yield, then you know the duration. You need 2 variables to determine duration. For some reason, you're using 3, and one of them is apparently ambiguous.

 

[quotes]

This article explains the link between DV01 and Duration. You may have already figured it out before reading it.

http://www.closemountain.com/papers/risktransform1.pdf