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Fixed Income Modelling$
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Claus Munk

Print publication date: 2011

Print ISBN-13: 9780199575084

Published to Oxford Scholarship Online: September 2011

DOI: 10.1093/acprof:oso/9780199575084.001.0001

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The Measurement and Management of Interest Rate Risk

The Measurement and Management of Interest Rate Risk

(p.323) 12 The Measurement and Management of Interest Rate Risk
Fixed Income Modelling

Claus Munk

Oxford University Press

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

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