Reading 58: Yield-Based Bond Convexity and Portfolio Properties

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Book 3: Fixed Income

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8 Terms

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Convexity

the measure of the curvature of the price-yield relation

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Convexity of a single period cash flow at period t =

t(t+1)/(1+r)²

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Convexity of a coupon-paying bond (def)

the weighted-average convexity of individual cash flows

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For nonannual coupon bonds, how does convexity need to be adjusted?

divided by the number of periods per year squared

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Factors that Affect Convexity causing it to increase

longer maturity

lower coupon

lower yield

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First Order Effects

duration

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Second Order Effects

convexity

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Money Convexity =

annual convexity x full price of bond position