Chapter

The Measurement and Management of Interest Rate Risk

Claus Munk

in Fixed Income Modelling

Published in print June 2011 | ISBN: 9780199575084
Published online September 2011 | e-ISBN: 9780191728648 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780199575084.003.0012
The Measurement and Management of Interest Rate Risk

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The values of bonds and other fixed income securities vary over time primarily due to changes in the term structure of interest rates. Most investors want to measure and compare the sensitivities of different securities to term structure movements. This chapter discusses how to quantify the interest rate risk of bonds and how these risk measures can be used in the management of the interest rate risk of portfolios. The traditional duration and convexity measures are critically reviewed and more appropriate versions of these measures are introduced. The application of the risk measures in the construction of so-called immunization strategies is explained. An application of a duration measure in the pricing of European options on bonds is also illustrated. Some alternative risk measures are discussed.

Keywords: duration; convexity; time value; immunization; bond option pricing; risk measures

Chapter.  17083 words.  Illustrated.

Subjects: Financial Markets

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