The valuation of debt finance, and duration (part 2) – ACCA (AFM) lectures
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Dear Sir,
Regarding the Macauley duration, in the notes it’s written that:
The following should be clear for each of the variables:
? Time to maturity: as the time to maturity increases, the Macaulay duration will also increase
? Coupon rate: as the coupon rate increases, the Macaulay duration decreases
? Yield to maturity (or gross redemption yield): as the yield to maturity increases, the Macaulay
duration decreases
For Time of maturity and Yield to maturity, the impact of changes to MD is clear.
I need further elaboration over the impact of changes of Coupon rate – as the coupon rate increases, the Macaulay duration decreases!
I simulate increase of Coupon rate in xls and see that really the MD decreases, but could you explain more thoroughly why this happens? Both nominator and denominator (MV) of MD formula increase in absolute values when the coupon rate rises (which is OK), but also I see that denominator MV is increasing relatively higher than the nominator.
Why the denominator (MV) increase with higher relative values than the nominator?
Sorry for the misspelling of the word numerator!
You must ask questions like this in the Ask the Tutor Forum and not as a comment on a lecture.
Is this part valid for june2022 exam?
Yes it is.
Sir, Just want to let you know how good your lectures are. I bought a paid course and I don’t watch it. I kept that aside and watching yours. You’re incredible
Thank you for your comment 馃檪
Hi John,
Thanks heaps for the lecture.
Just wondering, with previous lecture we have example one showing the interest (yield) changed from 10% to 15%, and the market value changed by 17.4% respectively. When I used the modified duration 3.94*change in yields (5%)=19.7%, which is different from 17.4%. Could you please kindly explain why it would be the case?
Many thanks!
I have the same question. Does anyone have an answer to this?
Ok, got it now. The limitation of the modified duration comes from the assumed linearity of the relationship between price and yield but in fact, the relationship is a convex curve, meaning it is only useful in assessing small changes in interest rates.
Thank you for the lectures Sir……just a tiny error in calculating the macaulay duration.Discount factor .826 and not .822.
Thanks for these lectures Sir. But you define the Macaulay Duration as “the avg time taken to return half our money” ,while on the internet and in an older text that i have it says ” the avg time taken to return the present value of cash flows of a project”
Even in the lecture notes it mentions ” The avg time taken by a bond to repay the principal and interest amounts”.
So can you please clarify this doubt?
Thank You
Can I calculate the Macaulay duration if I have used Annuity to calculate the yield?
I don’t know what you mean by ‘used annuity to calculate the yield’.
no you can’t…that’s why pv are calculated separately