November 1998
Intermediate to advanced
220 pages
6h 36m
English
Content preview from Fixed Income and Interest Rate Derivative Analysis
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CONVEXITY 127
Assuming convexity is 30 and duration is 5 the result is
1 30
2 125
x 0.02 = 0.0024
That is the convexity adjustment results in the addition of 24 basis points
onto the forward rate. The difference from the first analysis stems from the
fact that we have not calculated duration and convexity on a modified basis,
but this only makes a difference of around 1 basis point.
8.3
Further reading
Litterman, R., Scheinkman, J. and Weiss (1991) 'Volatility and the Yield
Curve'
Journal of Fixed Income.
8.4 Questions
1. A 20 year 8% annual coupon bond is selling at par. Calculate ...
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