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Exercise

Estimating effect of convexity on bond price

Now that you've calculated convexity for your bond, you can estimate the effect of convexity on the bond's price.

Specifically, recall from the video that the percentage change based on convexity is given by

$$0.5 * convexity * (\Delta y)^2$$

where \(\Delta y\) is the expected change in yield. The dollar change based on convexity is equal to the percentage change multiplied by the current price \(P\).

For this exercise, assume that yields are expected to decline by 1%.

The convexity object, which you calculated in the previous exercise as 116.521, and the px object, which is the price of the bond of $100, have been preloaded in your workspace.

Instructions
100 XP
  • Estimate percentage change (convexity_pct_change) based on convexity if yields decrease by 1%.
  • Estimate dollar change (convexity_dollar_change) based on convexity if yields decrease by 1%.
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