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Fixed Income Markets and Their Derivatives, 3rd Edition by Suresh Sundaresan

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Chapter 7

Bond mathematics: DV01, duration, and convexity

Chapter Summary

We develop the concept of dollar value of an 01 (DV01) or price value of a basis point (PVBP) to measure risk of fixed-income securities. The concept of price elasticity of debt securities with respect to interest rates is developed, and various duration measures such as Macaulay duration and modified duration are described. The chapter develops the concept of convexity and describes its measurement. Through several examples, this chapter develops these concepts and applies them to trading and hedging applications such as yield curve trades (steepening or flattening) and butterfly strategies. Alternative measures of duration such as effective duration are described to compute ...

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