Calculate approximate convexity for a bond
Recall from the video that we can improve the estimate of the bond price by adding a convexity term to the duration effect. The convexity term accounts for how bowed the price/YTM curve is for the bond.
In this exercise, you will calculate the approximate convexity for a bond with $100 par value, 10% coupon, 20 years to maturity, and 10% yield to maturity when you expect a 1% change in yield and add that to the duration effect. Recall that the approximate convexity formula is
$$(P(up) + P(down) - 2 * P) / (P * \Delta y ^ 2)$$
where \(P\) is the price of the bond, \(P(up)\) is the price of the bond when yields increase, \(P(down)\) is the price of the bond when yields decrease, and \(\Delta y\) is the expected change in yield.
The objects px, px_up, and px_down from the earlier exercise are preloaded in your workspace.
Este exercício faz parte do curso
Bond Valuation and Analysis in R
Instruções do exercício
- Calculate approximate convexity by incorporating the
px,px_up, andpx_downobjects into the formula listed above. You will also need to input an appropriate value fordy.
Exercício interativo prático
Experimente este exercício completando este código de exemplo.
# Calculate approximate convexity
convexity <- (___ + ___ - 2 * ___) / (___ * (___)^2)
convexity