Visualizing the Duration of Assets

This is just a simple example comparing the durations of two different assets.  Investment 1 pays $1000 in year 1, $2000 in year 2, and $3000 in year 3; Investment 2 pays $3000 in year 1, $2000 in year 2, and $1000 in year 3.  At an interest rate of 8%, investment 1 is worth $5022.10 and investment 2 is worth $5286.29.

Obviously asset 1 is more risky because its larger payments come later.  This means that the bulk of its worth is subject to more interest rate fluctuation.  We would expect it to have a higher Duration than asset 2.  This is easy to verify; The Duration of Asset 1 is 2.28983 (DM = 2.12) and the Duration of Asset 2 is 1.6247 (DM = 1.50435).  Therefore, we’d expect asset 1 to be disproportionately affected by interest rate fluctuations, which is evident from the graph below.

DurationPic2

The PV of the assets is almost the same at low interest rates, and investment 1 decreases in value more than investment 2 does when interest rates change.

 

About schapshow

Math & Statistics graduate who likes gymnastics, 90s alternative music, and statistical modeling. View all posts by schapshow

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

www.openeuroscience.com/

Open source projects for neuroscience!

Systematic Investor

Systematic Investor Blog

Introduction to Data Science, Columbia University

Blog to document and reflect on Columbia Data Science Class

Heuristic Andrew

Good-enough solutions for an imperfect world

r4stats.com

"History doesn't repeat itself but it does rhyme"

My Blog

take a minute, have a seat, look around

Data Until I Die!

Data for Life :)

R Statistics and Programming

Resources and Information About R Statistics and Programming

Models are illuminating and wrong

A data scientist discussing his journey in the analytics profession

Xi'an's Og

an attempt at bloggin, nothing more...

Practical Vision Science

Vision science, open science and data analysis

Big Data Econometrics

Small posts about Big Data.

Simon Ouderkirk

Remote Work, Small Data, Digital Hospitality. Work from home, see the world.

rbresearch

Quantitative research, trading strategy ideas, and backtesting for the FX and equity markets

Statisfaction

I can't get no

The Optimal Casserole

No Line Is Ever Pointless

SOA Exam P / CAS Exam 1

Preparing for Exam P / Exam 1 thru Problem Solving

schapshow

Mathematical statistics for the layman.

%d bloggers like this: