What is meant by the spread duration for a floating rate bond?
Spread duration is the sensitivity of the price of a security to changes in its credit spread. The credit spread is the difference between the yield of a security and the yield of a benchmark rate, such as a cash interest rate or government bond yield.
Do floating rate bonds have duration?
Yes. the duration of a floating rate bond is the time t until the next coupon payment, as your equation shows. The payments that come after are not known yet and will be determined based on interest rates then prevailing, so they carry no duration risk.
What is spread duration of a bond?
How do you calculate spread duration?
You can find bond spread duration formulas in advanced economics texts and on the web. where P = bond price, C = semiannual coupon interest (in dollars), y = one-half the yield to maturity and n = number of semiannual periods and M equals value at maturity.
What is spread duration?
Spread duration : (roughly) the (negative of the) percentage change in a bond’s price for a 1% change in its spread over a Treasury of the same maturity; although nobody ever says so, you can have modified spread duration (assuming that its cash flows don’t change) and effective spread duration (allowing that its cash …
What is duration spread?
Duration Times Spread (DTSSM) is a new measure of spread exposure for corporate bond portfolios. Changes in spreads are not parallel but rather linearly proportional to the level of spread, in that bonds trading at wider spreads experience greater spread changes.
What is FRN spread?
Floating rate notes (FRNs) are bonds that have a variable coupon, equal to a money market reference rate, like LIBOR or federal funds rate, plus a quoted spread (also known as quoted margin). The spread is a rate that remains constant. A typical coupon would look like 3 months USD LIBOR +0.20%.
What is the spread on bonds?
The bond spread or yield spread, refers to the difference in the yield on two different bonds or two classes of bonds. Investors use the spread as in indication of the relative pricing or valuation of a bond.
What does it mean when spreads are widening?
The direction of the spread may increase or widen, meaning the yield difference between the two bonds is increasing, and one sector is performing better than another. Widening spreads typically lead to a positive yield curve, indicating stable economic conditions in the future.
What is spread duration vs effective duration?
Spread duration is related to spread in the corporate bond in regard to risk free rate. But effective duration which is calulated for amortized securities and bond with embedded option like call option and put option.
What is the duration of a floating rate bond?
For instance the duration of a floating rate bond with a spread of 1% over ie libor is equivalent to the duration of any fixed cashflows (ie ones on or before the refix date like you have mentioned) plus the duration of a fixed coupon bond with coupon 1% going out to maturity.
Why are IR duration and spread duration the same?
Adding to the answer of Tim: If you consider a fixed-rate bond then IR-duration and spread-duration have the same effect on the bond. For a floating-rate bond, on the other side, you have IR-risk only until the next reset of the floating rate and thus very small IR-duration.
How is the Modified duration of a bond defined?
The problematic nature of the affected functions is best exemplified by the function Duration when it is specified to return the modified duration of a bond as a measure of the bond sensitivity on interest rates. As a reminder, the modified duration is defined as – (dP/dy)/P, where P is the present value and y the yield of the bond.
What’s the difference between duration and spread duration?
For risky bonds, duration is defined as sensitivity of price due to change in underlying yield while spread duration is sensitivity of price due to change in the ‘spread in yields to the Stack Exchange Network