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 issues, but I prefered to send a general message. Please disregard this CM if this is your case. The market factor (what generates the risk) in a bond, is the yield (the interest rate embedded in the investment). This means …showed first 75 words of 601 total…

…showed last 75 words of 601 total…volatility of the yield is 60 bps (0.6%) and the defeasance period is 4 days PS = 96.000 * 2.01 * 0.01 = $1930 (each time the yield changes 1%, the position changes $1930) PLA = 1930 * 0.6 * square root of 4 PLA = 1930 * 1.2 = $2316 (if the yield moves 1,20 % in the wrong direction, the potential loss would be $2316) As you see, the PLA for both examples is the same. By changing the unit shift, we only change the way we report sensitivity, but the risk of the whole transaction (PLA) should be the same.