Duration and Convexity Approximation Lab

Compare exact bond price changes to duration-only and duration-plus-convexity approximations

\(\frac{\Delta P}{P}\approx -D_{mod}\Delta y + \tfrac{1}{2}C(\Delta y)^2\)

Coupon rate 5.0%

Yield to maturity 6.0%

Maturity 12y

Shock range shown 300 bps

Selected shock +100 bps

Coupon payments per year

Approximation lines shown

Duration-only Duration + convexity

Modified duration

Convexity

Exact change at selected shock

Duration-only error
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