CFA Level 1 Fixed Income: Intro to Measurement of Interest Rate Risk

This video covers the whole of Reading 58 of the CFA Level 1 curriculum. We examine price/yield behavior along the yield spectrum, and identify peculiarities and characteristics of bond prices as yield changes. Next we look at how these characteristics are altered, sometimes dramatically, for bonds with put/call options compared to option-free bonds, and introduce the ideas of negative convexity and resultant price compression while discussing the full valuation approach. We then introduce the duration/convexity approach to estimating bond price changes, and show how to calculate and use effective duration, its short-comings, modified and macaulay duration, and finish off with how to calculate a bond’s convexity, and use it in tandem with duration to overcome the short-comings of using duration alone.