Duration and convexity
1. Duration and convexity
In Chapter Three, you learned about duration and convexity.2. Duration and convexity
You learned that changes in bond prices are affected by many factors. We discussed a few of those factors, including size of the yield change, coupon rate, and time to maturity. You learned how to calculate and use duration to estimate how bond prices change when interest rates change. You also learned that duration is a poor estimate for large yield changes and that is why we need to consider the convexity measure. You then learned how to calculate convexity and use that to augment the estimate of the bond price using duration alone. You saw how much better that estimate is of the bond price.3. Let's practice!
You will now go through a series of exercises on duration and convexity. In these exercises, you will continue with the bond you valued in the prior exercises. You will then estimate the bond price using duration and convexity assuming a 1% increase in yield.Create Your Free Account
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