Fixed Income

hrdee05
Posts: 1
Joined: Tue May 17, 2016 8:13 am

Fixed Income

Postby hrdee05 » Mon Oct 31, 2016 6:21 am

I need a little bit of clarity on Bond Convexity and Bond Duration. As per my understanding, Duration is the approximation of a bond's price in line with changes in the interest rates.
I have read that a duration measure always gives a lower actual price due to convexity. Why is that?

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Re: Fixed Income

Postby edupristine » Wed Nov 02, 2016 6:37 am

Hi

Bond Convexity- Bond convexity is a measure of the non-linear relationship of bond prices to changes in interest rates, the second derivative of the price of the bond with respect to interest rates.Convexity is a measure of the curvature of how the price of a bond changes as the interest rate changes.

Bond Duration- Duration is a way of measuring how much bond prices are likely to change if and when interest rates move. Duration is measured in years.the higher the duration of a bond or a bond fund the more its price will drop as interest rates rise.


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