DURATION SENSITIVITY AND PLA IN BONDS

A detailed Summary of DURATION SENSITIVITY AND PLA IN BONDS


Subject: DURATION, SENSITIVITY AND PLA IN BONDS

I would like to help some of you with a general explanation on how to

calculate sensitivity and PLA in bonds. Many of you may know these

but I prefered to send a general message. Please disregard this CM if

The market factor (what generates the risk) in a bond, is the yield

(the interest rate embedded in the investment). This means that the

Position Sensitivity should relate to changes in yields. This

then, multiplied by the volatility of the yields, would give us the PLA

associated with the bond positions (expected portential loss if the

To calculate the Position Sensitivity, first of all, you should know the

"modified duration" of the bonds that you are holding.

Duration is defined as the equivalent tenor in a bond, expressed in

of a zero coupon bond (a bond that has only one payment at maturity and

This means that for example, an investor should be completely indiferent

to invest in a zero coupon bond of 2.25 years than in a 4 years bond

say with annual principal and interest payment) with also a 2.25 years


3 25+ 5 = 30 21.35 22% 3 0.66



Some common words found in the essay are:
PLA PLA, Coupons Disc, Position Sensitivity, Sensitivity PS, PLA BONDS, unit shift, modified duration, pla =, ps =, * square root, * square, yield moves, let's assume, macaulay duration, position sensitivity, discount period, 4 pla =, root 4 pla, unit shift =, modified duration unit,

Approximate Word count = 1101
Approximate Pages = 4 (250 words per page double spaced)

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