Convexity

Question 1

When The difference between change in prices increases / drecreases when using Duration Alone and convexity?

Remember graph (Duration = line // Convexity is a curve)

Answer 1

Difference higher = Higher Convex.

Difference Lower = Lower convex.

Question 2

Modified convexity

Answer 2

△V - Vo
⎯⎯⎯⎯⎯⎯⎯
Vo (△y)ˆ2

Question 3

%△Price =

Answer 3

-(ModDur) * (+/-△y) + (1/2)*convexity * (△y)ˆ2

Question 4

Term Structure of Yield Volatility is the relatioship between:

Answer 4

Yield volatility x Time to maturity

Question 5

Relationship about price increase and deacrese with a swift in yields curve (Positive convex)

Answer 5

Price INC > P. DECRES

(Draw the graph on your head)

Question 6

What are the two concerns about term structure volatility?

Answer 6

Sensitiviy of a bond price to a given yield change
Volatility of a bonds yield

Question 7

Duration Gap formula
When Price risk dominates Reinvestment Risk?

Answer 7

Macaulay Duration - Invest. Horizon

if M.D > Invest. horizion