Study Notes: Applying Duration, Convexity, and DV01

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Chapter 12. Applying Duration, Convexity, and DV01 Study Notes cover the following learning objectives:

* Describe a one-factor interest rate model and identify common examples of interest rate factors.
* Define and compute the DV01 of a fixed income security given a change in yield and the resulting change in price.
* Calculate the face amount of bonds required to hedge an option position given the DV01 of each.
* Define, compute, and interpret the effective duration of a fixed income security given a change in yield and the resulting change in price.
* Compare and contrast DV01 and effective duration as measures of price sensitivity.
* Define, compute, and interpret the convexity of a fixed income security given a change in yield and the resulting change in price.
* Explain the process of calculating the effective duration and convexity of a portfolio of fixed income securities.
* Describe an example of hedging based on effective duration and convexity.*
* 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.

After reviewing the notes, you will be able to apply what you learned with practice questions.

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