Deck 12 – Convexity

How does adding convexity improve the estimate of a bond's percentage price change?

It adds a curvature adjustment to duration's linear estimate.

Why is duration alone only a linear approximation of a bond's price response to yield changes?

It uses the tangent slope, ignoring price-yield curvature.

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

When yield changes are large and curvature matters.

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

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