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The steps to calculate duration of a callable bond.

April 16, 2017
  1. Given assumptions about benchmark interest rates, interest rate volatility, and call or put rule, calculate OAS using binomial model.
  2. Impose a small shift in the on-the-run yield curve +Δy
  3. Build a new binomial tree using the new yield curve
  4. Add OAS to each 1-year forward rate to get a “modified” tree.
  5. Compute BV+Δy using modified tree
  6. Repeat steps 2 through 5 using a parallel rate shift of -Δy to estimate value of BV-Δy
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From → Asset Valuation

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