Doubts

Mockexam 1c

Mockexam 1c

by Helena Caty Naefeke -
Number of replies: 1

Dear Professor, 

I had struggles finding the origin of the formula used in the solutions of the Mockexam Exercise 1c.

The formula was: Delta P = -D * Delta y

I find it hard to derive this formula from the approximation provided in the Midterm Formula sheet: Delta P/Pt = D/(1+y) * delta y

Is there a rule when to use the modified duration or the Macaulay duration when using the new formula provided in the Mockexam solutions?

Thank you very much!

Best regards

Helena


In reply to Helena Caty Naefeke

Re: Mockexam 1c

by Julio Crego -
Dear Helena

The formula is in the formula sheet.

About whether to use Macaulay or the modified version, please check this post. It also hints about where the formulas (both of them come from). Essentially, they are both linear approximations of the bond price (or log-price) around the current yield. 

Best