The measuring of interest rate risk of bond portfolio

Abstract

This article considers the sensitivity to interest rates changes of market value of the bonds. In order to address this problem the model developing F. Macaulay's approach based on the analysis of elasticity of present value of the cash flows on the bond expected to receiving is offered. The research leans on such general scientific methods as observation, comparison and formalization and such special methods as economic-mathematical modeling and the statistical analysis. Modern approaches to definition and analysis of interest rate risk based on perspective (Macaulay duration, complimentary duration) and retrospective (Value-at- Risk) analysis considered. The disadvantages and limitations of using these models described. The present article considers the model based on comparing the duration as a bond's length of economic life with the extension to its maturity. Relative duration could be interpreted as a relative payback of investments in bonds rate. On the other hand, this indicator rather than Macaulay's duration could be interpreted as a interest risk comparison ratio which does not depend on bonds terms and structure of the maturities which is the novelty of this methodology. This interpretation is proved by the statistical analysis of sample of 20 bonds with different levels of duration. The technique of the evaluation of interest rate risk of portfolio of debt market-base instruments is suggested.