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BOND MATH: The Theory Behind the Formulas by Donald J. Smith

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Conclusion

Duration and, to a lesser extent, convexity are core topics in the study of bond math, right up there with price and yield calculations and conversions, and yield curve analysis. These statistics are fundamentally mathematical and are derived using algebra and calculus. Duration is sometimes just a building block for more developed models of risk. For example, value-at-risk (VaR) analysis includes the effect of varying volatilities and correlations for points along the yield curve. While VaR commonly is used for risk measurement in financial institutions and is subject to its own limitations and misapplications, it goes “beyond duration” in terms of mathematics and statistics. But to get there, you need a solid foundation in classic ...

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