Bond Convexity   Basics
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Bond Convexity Basics

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  • 1. BOND CONVEXITY Basics Annual Percentage Rate Inputs Rate Convention: 1 = EAR, 0 = APR 0 Annual Coupon Rate (CR) 5.0% Yield to Maturity (Annualized) (y) 9.0% Number of Payments / Year (NOP) 2 Number of Periods to Maturity (T) 8 Face Value (FV) $1,000 Outputs Discount Rate / Period (RATE) 4.5% Coupon Payment (PMT) $25 Calculate Bond Convexity using the Cash Flows Period 0 1 2 3 4 5 6 7 Time (Years) 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Cash Flows $25.00 $25.00 $25.00 $25.00 $25.00 $25.00 $25.00 Present Value of Cash Flow $23.92 $22.89 $21.91 $20.96 $20.06 $19.20 $18.37 Weight 2.8% 2.6% 2.5% 2.4% 2.3% 2.2% 2.1% Weight * (Time^2+Time) 0.02 0.05 0.09 0.14 0.20 0.27 0.33 Convexity 16.23 Calculate Bond Convexity using the Formula Convexity 16.23
  • 2. 8 4.0 Total $1,025.00 $720.76 $868.08 83.0% 100.0% 16.61 17.72