Sensitivity of value of security to change in market yields

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Reference no: EM131176775

In terms of the following three empirical tendencies, discuss how they are related to the concept of duraiton or sensitivity of the value of a secruity (or portfolio) to a change in market yields, and to the need that certain investors might have for the securing of a minimum yield over specified holding period (H), or portfolio immunization. In your analysis, discuss the concept that an immunized portfolio, under some specific simplifying assumptions, has a duration equal to the investor's desired holding period. Consider the duration of a zero coupon bond in your disccusion of immunization.

EmpiricalTendency1: A given change in yield to maturity affects the prices and rates of return of long-term more than short-term securities.

EmpiricalTendency2: Short-term yields normally flucuate more widely than long-term yields.

EmpiricalTendency3: Although long-term yields tend to cary les than short-term yields, the greater sensitivity of long-term prices to yield changes normally dominates relative price movements. That is, the prices of longer term securities normally undergo much greater changes than the prices of short temrs so that investors in long-term securities enjoy greater gains when yields fall and suffer greater losses when yields rise than do the holders of short-term securities.

Reference no: EM131176775

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