Money duration
Modified duration multiplied by the full price, so sensitivity is expressed in money. The only form a hedge can actually be transacted in.
Where you will meet it
Money duration appears in 5 learning outcomes on the CFA syllabus. A few of them:
- Tell apart Macaulay duration, modified duration and money duration
“Money duration, or dollar duration, multiplies modified duration by the full price and gives the change in money terms.”
- Contrast approaches to one liability with approaches to a schedule of liabilities, and the different ways each can be implemented
“Duration matching needs asset present value at least equal to liability present value, equal money duration (basis point value), and asset convexity above liability convexity but no higher than necessary.”
- Explain the approach known as liability-driven investing
“The core tool is matching the money duration (basis point value) of assets to that of liabilities so the surplus is protected from rate changes; hedge ratio = asset BPV ÷ liability BPV.”
- Work out a bond's PVBP (value change per basis point) and explain it
“It can also be approximated as modified duration x full price x 0.0001, and it is one ten-thousandth of money duration.”
See also
Practise it
Practise money duration until it is automatic: questions that explain every wrong option.
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