CFA Level 3 | Fixed Income: Macaulay Duration, Dispersion and Convexity

Visit www.noesis.edu.sg for more info on CFA prep courses in Malaysia, Singapore, or wherever you are.
☕ Like the content? Support this channel by buying me a coffee at www.buymeacoffee.com/riskmaestro
CFA Level 3
Topic: Fixed Income Portfolio Management
Reading: Liability-Driven and Index-Based Strategies
In this video, I illustrate how interest rate immunization works when managing the interest rate risk of a single liability. Using Excel, I will build the cash flow schedule, the compute cash flow yield, Macaulay Duration, dispersion statistic and convexity.
Finally, we see the impact of changes in cash flow yield on the bond portfolio value if we hold the portfolio till the Macaulay duration.
Visit www.noesis.edu.sg for more info on CFA prep courses in Malaysia, Singapore, Vietnam, and etc.

[@mickeykoutsoukos8951]

Thank you. Excellent illustration.

[@ahmedmalik6930]

Great video Fabian! With a numerical description, I now have a very clear understanding as to how price and reinvestment risks are offsetting each other. Great content.

[@weiwuguanyu1471]

So excellent and learnt financial modeling at the same time....

[@gemleaf]

Thanks Fabian this video is really great! For those who are also struggle with Fixed Income like me, this video is very useful for the CFA level 3 (2022-2023) curriculum book 2 Reading 12 cf exhibit 5.

[@elainehuang3512]

I'm preparing the Exam, the video is very helpful ,thank you!

[@nguyenmanhquan1402]

This video is so helpful for me. Thank you a lot!

[@dougnicol6270]

Great explanation

[@alexh.4842]

Great job as always! Very much appreciated!

[@FabianMoa]

Thank you! Cheers!

[@jiannanzhang8636]

great video

[@FabianMoa]

Thanks!

[@alexzhou4907]

very helpful

[@FabianMoa]

Glad to hear that, Alex!

[@YH-ic9iv]

Thanks Fabian for the video. May I ask if you could explain how we can use both duration and convexity in immunization, please?

[@FabianMoa]

In summary, for immunization, the money duration (modified duration x market value) of the assets must be equal to or exceed the money duration of the liabilities. For a single liability, the convexity of assets must be minimized. For multiple liabilities, the convexity of assets have to exceed the convexity of the liabilities.

[@hriday.]

Awesome explanation! Quick question at 22:27. I think you meant assuming the YTM increases by 1% and not cash flow yield?

[@FabianMoa]

The cash flow yield is the YTM of the portfolio

[@s.m.hassan3887]

fabian can u share the excel sheet template so we work along with the video as well

[@sammyNpoo]

Hi While calculating modified duration you are already using annualized MacDur. Why did you have to divide by two then?

[@shadowm28]

Love your videos Fabian. For annual coupon bonds, how would you calculate the dispersion and convexity?

[@FabianMoa]

You would do it the same way as in the video but the periods 1, 2, 3, ... will be in annual terms.

[@kashansamad197]

Great video@@FabianMoa, I've liked and subscribed as well. What about loan portfolio with different coupon frequencies? are we going to calculate cashflows using smallest frequency period?

[@FabianMoa]

Using daily cashflows would provide more accuracy

[@SherifaIssifu-cj5ln]

A lot of the examples I see are with rounded time periods or years to maturity, what is the best way to adjust for fractional periods such as 14.58 years or more real world scenarios?

[@johnchung120]

Hey Fabian - Question on the last bit. Can I say if the liability is immunized (liability is due at ~6.008 years) and the portfolio is held to Macaulay-duration maturity, then no matter where the yield goes (ups or downs), the portfolio can still cover my liability. It's just the fact that, in your example, the portfolio value does change upon yield changes got me thinking if this portfolio still has the ability to immunize the liability? thanks!

[@FabianMoa]

"Can I say if the liability is immunized (liability is due at ~6.008 years) and the portfolio is held to Macaulay-duration maturity, then no matter where the yield goes (ups or downs), the portfolio can still cover my liability" - Yes "It's just the fact that, in your example, the portfolio value does change upon yield changes got me thinking if this portfolio still has the ability to immunize the liability" - You can observe that regardless whether there was an upward or downward shift, the value of the portfolio was quite similar (under the two scenarios). And the values under both scenarios are higher than if there was no change in yield at all (so that creates a buffer for covering the liability too).