Applying Duration, Convexity, and DV01 (FRM Part 1 2025 – Book 4 – Chapter 12)

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After completing this reading, you should be able to:
Describe an interest rate factor and identify common examples of interest rate factors.
Define and compute the DV01 of a fixed income security given a change in yield and the resulting change in price.
Calculate the face amount of bonds required to hedge an option position given the DV01 of each.
Define, compute, and interpret the effective duration of a fixed income security given a change in yield and the resulting change in price.
Compare and contrast DV01 and effective duration as measures of price sensitivity.
Define, compute, and interpret the convexity of a fixed income security given a change in yield and the resulting change in price.
Explain the process of calculating the effective duration and convexity of a portfolio of fixed income securities.
Explain the impact of negative convexity on the hedging of fixed income securities.
Construct a barbell portfolio to match the cost and duration of a given bullet investment, and explain the advantages and disadvantages of bullet versus barbell portfolios.

0:00 Introduction
1:01 Interest Rate Factors
7:58 DV01 of a Fixed Income Security
12:04 Hedging a Bond Position Given the DV01
17:42 Effective Duration of a Fl Security
20:44 Hedging using Duration
28:36 Price Change Using Both Duration and Convexity
32:35 The Impact of Negative Convexity on Hedging
37:57 Example: DV01 of a Callable Bond
40:52 Barbell Portfolio vs. Bullet Portfolio