Thiruspace.com : SampleTopics : Bond Convexity 4.3.9
Duration and Convexity - Some Interesting Calculations..
Bond Price Behaviour - First lessons in Convexity.
Simply put Duration is the weighted maturity of a bond's cash flows:
Sum(C
t *t*(1/(1+r)^t)) / Sum(C
t*(1/(1+r)^t))
where C
t is cash flow in period t and r is the interest rate.
As you can see in the following chart, considering Duration, by itself, leads to an incomplete picture of a typical risk-profile, as it renders merely the
linear coefficient of changes in market-curve.
Convexity is the second-degree expansion of Taylor Series (that we discussed in
a previous session). The sum of both Duration and Convexity numbers,
calculates an effective Price for a Bond at a given yield point. This effective
price computation should be reasonably closer to Actual price computation.
Bond Price Behaviour -> Duration + Convexity Effect
Par Value Required
Input ParValue between 10 and 1000
Maturity Required
Input Maturity 0.25 to 30 years
Coupon Rate Required
Input Coupon between 0.2 to 12 as Percent
Yield Required
Input Yield between 0.2 to 12 Percent