Social Sharing
Extended Viewer
Uses and Abuses of Convexity
Nov 1, 1988
A popular technique in the fixed income world is linking the percentage price change of a bond (for a given change in yield) to the bond's duration and convexity. This technique makes use of a Taylor series expansion and the idea that duration and convexity are variants of the first and second derivatives of the valuation equation. Much has been made elsewhere of the drawbacks of using duration and convexity as the only measures of a bond's risk, or even as measures of the bond's interest rate risk. This article explores the paradoxes that arise in modelling optionable bonds and the representation of price changes through a Taylor series expansion.