Bonds III: Duration and convexity

At this point we know how to price bonds and how to assess their default risk and market risk. The former is evaluated by rating agencies and summarized in credit ratings. The latter can be assessed as we discussed in the previous chapter, as well as with two critical tools widely used by bond traders, duration and modified duration, both of which we discuss in this chapter.

Maturity reconsidered

We discussed in the previous chapter that one of the most important sources of a bond’s risk is its market (or interest-rate) risk, which measures the bond’s price (or return) ...

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