Deck 12 – Convexity

What is the improved duration-plus-convexity approximation for bond price change?

$pprox-ModDur\times \Delta y+\frac{1}{2}\times Cvx\times (\Delta y{)}^2$

When does a duration-only estimate of bond price change break down most noticeably?

When yield changes are large and curvature matters.

Why is positive convexity valuable to bond investors?

Prices rise more when yields fall than they drop when yields rise.

What convexity pattern is typical for an option-free bond?

Positive convexity.