Exercise

# Estimating the bond price using duration and convexity

In an earlier exercise, you calculated the dollar change due to duration of 8.5459 and convexity of 0.5826. You stored these two values in `duration_dollar_change`

and `convexity_dollar_change`

, respectively.

Recall that the price of the bond is $100, which is stored in the object `px`

. In this exercise, you will be asked to calculate the estimated change in price based on duration and convexity and calculate the estimated new price of the bond when yields decrease by 1%.

Suppose you know that the bond's duration leads to a price effect of `8.5459`

, which we will store in the object `duration_dollar_change`

. Suppose we also know that the bond's convexity leads to a price effect of `0.5826`

, which we will store in the object `convexity_dollar_change`

. In this exercise, you will add the duration and convexity effects to arrive at the estimated bond price.

Instructions

**100 XP**

- Estimate change in price (
`price_change`

) due to duration and convexity. To do this, combine the`duration_dollar_change`

with`convexity_dollar_change`

. - Estimate
`price`

based on duration and convexity. This formula should have similarities to your formula for`price_change`

, but should incorporate the bond's current price (`px`

).