Just as with yield-based interest rate risk measures, effective duration and effective convexity can be used to estimate the percentage change in a bond’s full price for a given shift in the benchmark yield curve (∆Curve),
Yield duration and convexity assume a bond’s cash flows are certain. However, if a bond has contingency features, such as embedded options, as with a callable (or puttable) bond, then future cash flows are uncertain since option exercise depends on the level of market interest rates relative to coupon interest being paid (or received). For example, the…