Given Data

n
C
F
y
delta-y

P
DMOD
conv-1
conv-2
conv-3
conv-4
Convexity
R

20
0
100
0.09
-0.001

The number of semi-annual periods

The semi-annual coupon rate
The par value of the bond
The annualized bond yield rates
Change in the value of yield

$41.46429
9.5693780
$0.02
0
0
15947.4371985555
96.1516448799
0.005024

The value of R describes the relative importance of

convexity and duration in explaining a bond's
percentage price change

Number of years

Duration

10

20

Given Data
n
C
F
y
delta-y
P
DMOD
conv-1
conv-2
conv-3
conv-4
Convexity

20 The number of semi-annual periods

0 The semi-annual coupon rate
100 The par value of the bond
0.09 The annualized bond yield rates
-0.001 Change in the value of yield
41.4642859685
9.5693779904
0.0241171402
0
0
15947.43719856
96.1516448799
The value of R describes the relative importance of
0.0050239234
convexity and duration in explaining a bond's
percentage price change

0.005024
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00

5.50

6.00
6.50
7.00
7.50
8.00
8.50
9.00
9.50
10.00
10.5

0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00

Semi-annual coupon rates

Semi-annual coupon rates

4.50
5.00
5.50
6.00
6.50
7.00
7.50
8.00
8.50
9.00
9.50
10.00
10.50

Number of years

Duration

10

20

4
0.00119
0.00119
0.00119
0.00118
0.00118
0.00118
0.00118
0.00117

8
0.00214
0.00212
0.00211
0.00210
0.00209
0.00207
0.00206
0.00205

12

12
0.00307
0.00304
0.00301
0.00298
0.00295
0.00293
0.00290
0.00288

16

16
0.00400
0.00393
0.00388
0.00383
0.00378
0.00373
0.00369
0.00366

20

Semi-annual Periods
20
0.00491
0.00480
0.00471
0.00463
0.00456
0.00449
0.00444
0.00438

0.00117
0.00117
0.00116
0.00116
0.00116
0.00116
0.00116
0.00115
0.00115
0.00115
0.00115
0.00114
0.00114

0.00204
0.00203
0.00202
0.00201
0.00201
0.00200
0.00199
0.00198
0.00197
0.00197
0.00196
0.00195
0.00195

0.00286
0.00284
0.00282
0.00280
0.00279
0.00277
0.00275
0.00274
0.00273
0.00271
0.00270
0.00269
0.00268

0.00362
0.00359
0.00356
0.00353
0.00351
0.00348
0.00346
0.00344
0.00342
0.00340
0.00338
0.00336
0.00335

0.00433
0.00429
0.00425
0.00421
0.00417
0.00414
0.00411
0.00408
0.00405
0.00403
0.00401
0.00398
0.00396

24

28

32

36

40

24
0.00580
0.00564
0.00551
0.00539
0.00529
0.00520
0.00512
0.00505

28
0.00667
0.00645
0.00626
0.00611
0.00598
0.00586
0.00576
0.00568

32
0.00751
0.00722
0.00698
0.00678
0.00661
0.00647
0.00635
0.00625

36
0.00833
0.00794
0.00764
0.00740
0.00720
0.00703
0.00689
0.00677

40
0.00912
0.00862
0.00825
0.00796
0.00773
0.00754
0.00739
0.00725

emi-annual Periods

Value

0.00499
0.00493
0.00488
0.00483
0.00479
0.00475
0.00471
0.00468
0.00464
0.00461
0.00459
0.00456
0.00453

0.00560
0.00553
0.00546
0.00541
0.00536
0.00531
0.00527
0.00523
0.00519
0.00515
0.00512
0.00509
0.00507

0.00616
0.00607
0.00600
0.00594
0.00588
0.00583
0.00578
0.00573
0.00569
0.00566
0.00562
0.00559
0.00556

0.00667
0.00658
0.00650
0.00643
0.00636
0.00631
0.00625
0.00621
0.00616
0.00612
0.00609
0.00605
0.00602

0.00714
0.00704
0.00695
0.00688
0.00681
0.00675
0.00669
0.00664
0.00660
0.00656
0.00652
0.00648
0.00645

Value

Change in the value of R with respect to change in Coupon rates and change in bond
0.01000
0.00900
0.00800
0.00700
0.00600
0.00500

Value of
R
0.00400
0.00300
0.00200

0.00900
0.00800
0.00700
0.00600
0.00500

Value of
R
0.00400
0.00300
0.00200
0.00100
0.00000

36 40
24 28 32
12 16 20

ates and change in bond maturity

40
28 32 36
16 20 24

Given Data
n
C
F
y
delta-y
P
DMOD
conv-1
conv-2
conv-3
conv-4
Convexity
R

20 The number of semi-annual periods

0 The semi-annual coupon rate
100 The par value of the bond
0.09 The annualized bond yield rates
-0.001 Change in the value of yield
41.4642859685
9.5693779904
0.0241171402
0
0
15947.4371985555
96.1516448799
0.0050239234

The value of R describes the relative

importance of convexity and duration in
explaining a bond's percentage price change

0.005024
-0.001
-0.002
-0.003
-0.004
-0.005
-0.006
-0.007
-0.008
-0.009
-0.010
-0.011
-0.012
-0.013
-0.014
-0.015
-0.016
-0.017
-0.018
-0.019
-0.020
-0.021
-0.022
-0.023
-0.024
-0.025

-0.001
-0.002
-0.003
-0.004
-0.005

Change in annualized yield to maturity rates

(%)

-0.006
-0.007
-0.008
-0.009
-0.010
-0.011
-0.012
-0.013
-0.014
-0.015
-0.016
-0.017
-0.018
-0.019
-0.020
-0.021
-0.022
-0.023
-0.024
-0.025

Number of years

Duration

10

20

4
0.001196
0.002392
0.003589
0.004785
0.005981

8
0.002153
0.004306
0.006459
0.008612
0.010766

12

12
0.003110
0.006220
0.009330
0.012440
0.015550

16

16
0.004067
0.008134
0.012201
0.016268
0.020335

20

Semi-annual Periods
20
0.005024
0.010048
0.015072
0.020096
0.025120

0.007177
0.008373
0.009569
0.010766
0.011962
0.013158
0.014354
0.015550
0.016746
0.017943
0.019139
0.020335
0.021531
0.022727
0.023923
0.025120
0.026316
0.027512
0.028708
0.029904

0.012919
0.015072
0.017225
0.019378
0.021531
0.023684
0.025837
0.027990
0.030144
0.032297
0.034450
0.036603
0.038756
0.040909
0.043062
0.045215
0.047368
0.049522
0.051675
0.053828

0.018660
0.021770
0.024880
0.027990
0.031100
0.034211
0.037321
0.040431
0.043541
0.046651
0.049761
0.052871
0.055981
0.059091
0.062201
0.065311
0.068421
0.071531
0.074641
0.077751

0.024402
0.028469
0.032536
0.036603
0.040670
0.044737
0.048804
0.052871
0.056938
0.061005
0.065072
0.069139
0.073206
0.077273
0.081340
0.085407
0.089474
0.093541
0.097608
0.101675

0.030144
0.035167
0.040191
0.045215
0.050239
0.055263
0.060287
0.065311
0.070335
0.075359
0.080383
0.085407
0.090431
0.095455
0.100478
0.105502
0.110526
0.115550
0.120574
0.125598

24

emi-annual Periods
24
0.005981
0.011962
0.017943
0.023923
0.029904

28

32

36

40

28
0.006938
0.013876
0.020813
0.027751
0.034689

32
0.007895
0.015789
0.023684
0.031579
0.039474

36
0.008852
0.017703
0.026555
0.035407
0.044258

40
0.009809
0.019617
0.029426
0.039234
0.049043

Value o

0.035885
0.041866
0.047847
0.053828
0.059809
0.065789
0.071770
0.077751
0.083732
0.089713
0.095694
0.101675
0.107656
0.113636
0.119617
0.125598
0.131579
0.137560
0.143541
0.149522

0.041627
0.048565
0.055502
0.062440
0.069378
0.076316
0.083254
0.090191
0.097129
0.104067
0.111005
0.117943
0.124880
0.131818
0.138756
0.145694
0.152632
0.159569
0.166507
0.173445

0.047368
0.055263
0.063158
0.071053
0.078947
0.086842
0.094737
0.102632
0.110526
0.118421
0.126316
0.134211
0.142105
0.150000
0.157895
0.165789
0.173684
0.181579
0.189474
0.197368

0.053110
0.061962
0.070813
0.079665
0.088517
0.097368
0.106220
0.115072
0.123923
0.132775
0.141627
0.150478
0.159330
0.168182
0.177033
0.185885
0.194737
0.203589
0.212440
0.221292

0.058852
0.068660
0.078469
0.088278
0.098086
0.107895
0.117703
0.127512
0.137321
0.147129
0.156938
0.166746
0.176555
0.186364
0.196172
0.205981
0.215789
0.225598
0.235407
0.245215

Value o

Change in the value of R with respect to change in annualized yield to maturity rates
0.250000
0.200000
0.150000

Value of R

0.100000
0.050000

0.250000
0.200000
0.150000

Value of R

0.100000
0.050000
0.000000

2
20 24
16
12

d yield to maturity rates and change in bond maturity

36 40
28 32
24
20
12 16

Inferences - Hands On Project 1

Overview

General Inferences

Takeaways for the

investor

General Inferences

Takeaways for the

investor

Inferences - Hands On Project 1

1. The value of R gives the relative importance of convexity and duration in explaining a bond's percentage change in price from
2. Duration and convexity are two metrics used to help investors understand how the price of a bond will be affected by change
3. Duration gives the first order approximation of the sensitivity of the bond prices to changes in yield while convexity gives the

Que (b)

1. For a given semi-annual coupon rate, the value of R increases with the increase in maturity. Hence, the impact of convexity is
maturity periods.

2. For a given maturity period, the value of R decreases with an increase in the coupon rate. The effect of convexity on the sens
an incerase in coupon rate.

1. If the investor has invested in a fixed-rate high maturity bond, then he must consider the effect of the second-order convexity
yields on the prices of his bond. Estimating the changes in bond prices purely on the basis of the first-order duration term would

2. If the investor has invested in a floating-rate bond and expects the yields to decrease (and hence the coupon rates to decrease
determining the changes in bond prices,especially for floating-rate bonds with a high maturity period. The investor must hence
the bond duration for a more accurate estimation.

Que (c)

1. For a zero-coupon bond, the value of R increases as the decrease in the annualized yield to maturity becomes more steep. Thi
with higher maturity.

1. If the investor has invested in a zero-coupon bond and faces a situation wherein he expects the market yields to decrease shar
convexity to estimate the sensitivity of bond prices, especially when the maturity period of the bond is high.

SUMMARY

The bond investor must not resort to a linear hedging strategy (hedging strategy based on the first order, duration based estim
1. Low coupon high maturity bonds
2. In case the forecasted yields are bound to decrease steeply