Portfolio Duration and Convexity
There are two ways to calculate the duration and convexity of a bond portfolio:
Bond Risk and Return Using Duration and Convexity
Money convexity (MoneyCon) captures the second-order effect in currency terms and is the annual convexity multiplied by the full price, Similar to estimating the percentage change in a bond’s full price, MoneyDur and MoneyCon are combined to achieve a more accurate, thus less risky, estimate of the change in a bond’s full price,
Bond Convexity and Convexity Adjustment
Convexity is a complementary risk metric that measures the second-order (non-linear) effect of yield changes on price for an option-free fixed-rate bond. The true relationship between a bond’s price and its yield-to-maturity is the curved (convex) line that shows the actual bond price given its market discount rate. Duration (i.e., money duration) estimates the change in…
Money Duration and Price Value of a Basis Point
Modified duration is used to measure the percentage price change of a bond given a change in its yield-to-maturity. A related statistic is money duration. The money duration of a bond is a measure of the price change in currency units. Money duration (MoneyDur) is the product of the annualized modified duration and the full price (PVFull) of the…
Modified Duration
or Without the negative sign, this is known as a bond’s modified duration, or ModDur: The change in annualised yield-to-maturity: Approximate Modified Duration
Macaulay Duration
The general calculation of Macaulay duration, MacDur, that also accounts for partial coupon periods if the calculation is done between coupon dates where Finally, another approach to calculating Macaulay duration is to use a closed-form equation derived using calculus and algebra, where
Sources of Return from Investing in a Fixed-Rate Bond
Fixed-rate bond investors have three sources of return:
