Master advanced bond concepts for the ISE exam. Learn about duration, convexity, immunization strategies, and bond portfolio management.
Advanced Bond Analytics for ISE
The ISE requires deeper understanding of fixed income concepts than the RSE. Master these advanced topics for exam success.
Duration Concepts
Macaulay Duration
- Weighted average time to receive cash flows
- Measured in years
- Higher coupon = lower duration
- Longer maturity = higher duration
Modified Duration
- Price sensitivity to yield changes
- Modified Duration = Macaulay Duration / (1 + yield)
- Approximates % price change for 1% yield change
Duration Rules
- Zero-coupon bond: duration = maturity
- Duration increases as coupon decreases
- Duration increases as yield decreases
- Portfolio duration = weighted average of holdings
Convexity
- Curvature of price-yield relationship
- Duration assumes linear relationship (approximation)
- Convexity improves the estimate
- Positive convexity: price rises more than it falls
Portfolio Immunization
Concept
- Matching portfolio duration to liability horizon
- Protects against interest rate changes
- Used by pension funds and insurance companies
Implementation
- Calculate target duration
- Select bonds to match
- Rebalance as rates change
Yield Curve Strategies
- Bullet: Concentrated at one maturity
- Barbell: Short and long, no middle
- Ladder: Spread across maturities
Key Exam Topics
- Duration calculations and interpretation
- Factors affecting duration
- Using duration to estimate price changes
- Portfolio immunization concepts
- Yield curve strategies
Tags:ISE bond analyticsdurationconvexity