A note on approximating bond returns allowing for both yield change and time passage

Johansson, Bo (2012): A note on approximating bond returns allowing for both yield change and time passage.

Abstract

A number of papers through the years have addressed the price-yield relationship, the approximation of bond returns and the associated components of price sensitivity. Typically, the research has been focused around the concept of duration and convexity to explain the price sensitivity of a bond to changes in its yield. Fixed income portfolio managers, however, are also interested in what happens to bond prices over a certain investment horizon, i.e. how time passage affect bond returns together with yield changes. Chance and Jordan [1996] examines this in a very neat way by a second order Taylor series expansion around the current market yield

• Item Type: MPRA Paper
• Language: English
• Keywords: Bond returns, bond return approximation, bond price sensitivety, duration, convexity, time value , yield changes, time passage, fixed income, investment horizon, yield scenarios, portfolio optimazation, what-if analysis, break-even analysis, price-yield relationship.
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G17 - Financial Forecasting and Simulation

References

Barber, Joel R. ”A note on Approximating Bond Price Sensitivity Using Duration and Convexity.” The Journal of Fixed Income, March 1995, pp. 95-98.

Chance, Don M., Jordan James V. “Duration, Convexity, and Time as Components of Bond Returns.” The Journal of Fixed Income, September 1996, pp. 88-96.

Christensen, Peter O., Sorensen, Bjarne G. ”Duration, Convexity, and Time Value.” The Journal of Portfolio Management, Winter 1994, pp. 51-60.