Time

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

Cash Flow
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$ 1,040.00

Macaulay's duration:
PV of CF Price Weighted PV Time Weighted PV
$ 38.74
0.0349
0.0349
$ 37.52
0.0338
0.0677
$ 36.34
0.0328
0.0983
$ 35.20
0.0317
0.1269
$ 34.09
0.0307
0.1537
$ 33.02
0.0298
0.1786
$ 31.98
0.0288
0.2018
$ 30.97
0.0279
0.2234
$ 30.00
0.0270
0.2434
$ 29.05
0.0262
0.2619
$ 28.14
0.0254
0.2791
$ 27.25
0.0246
0.2949
$ 26.39
0.0238
0.3094
$ 25.56
0.0230
0.3227
$ 24.76
0.0223
0.3349
$ 23.98
0.0216
0.3459
$ 23.22
0.0209
0.3560
$ 22.49
0.0203
0.3651
$ 21.78
0.0196
0.3732
$ 548.57
0.4946
9.8927

YTM
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%
10.50%
11.00%
11.50%

Compa
$2,000.00
$1,500.00
$1,000.00

4.00%

3.50%

3.00%

$-

2.50%

$500.00
2.00%

Value
$
1,000.00
8%
10
2
6.50%
$
1,109.05
14.46
7.23
14.01
7.00

1.50%

Particulars
Assumed Bond Face Value
Assumed Bond Coupon
Assumed Years to Maturity
Coupon Frequency
Assumed Current Yield (YTM)
Initial Price (P)
Macaulay's Duration - Semi Annual
Macaulay's Duration - Annual
Modified Duration - Semi Annual (D)
Modified Duration - Annual (D)

Price: M-Du

Modified duration Based Price Change

Change in YTM % Change in Price
-5.00%
35.02%
-4.50%
31.52%
-4.00%
28.02%
-3.50%
24.52%
-3.00%
21.01%
-2.50%
17.51%
-2.00%
14.01%
-1.50%
10.51%
-1.00%
7.00%
-0.50%
3.50%
0.00%
0.00%
0.50%
-3.50%
1.00%
-7.00%
1.50%
-10.51%
2.00%
-14.01%
2.50%
-17.51%
3.00%
-21.01%
3.50%
-24.52%
4.00%
-28.02%
4.50%
-31.52%
5.00%
-35.02%

Comparison of Bond Prices

0.00

0.00

0.00

Price: M-Duration

Theoretical Price

Price Change
Price: M-Duration Theoretical Price
$
1,497.46 $
1,601.51
$
1,458.62 $
1,541.37
$
1,419.78 $
1,483.98
$
1,380.94 $
1,429.22
$
1,342.10 $
1,376.94
$
1,303.25 $
1,327.03
$
1,264.41 $
1,279.36
$
1,225.57 $
1,233.84
$
1,186.73 $
1,190.34
$
1,147.89 $
1,148.77
$
1,109.05 $
1,109.05
$
1,070.20 $
1,071.06
$
1,031.36 $
1,034.74
$
992.52 $
1,000.00
$
953.68 $
966.76
$
914.84 $
934.96
$
875.99 $
904.52
$
837.15 $
875.38
$
798.31 $
847.47
$
759.47 $
820.74
$
720.63 $
795.14

Error
-6.497%
-5.368%
-4.326%
-3.378%
-2.531%
-1.792%
-1.169%
-0.670%
-0.303%
-0.077%
0.000%
-0.080%
-0.327%
-0.748%
-1.354%
-2.152%
-3.154%
-4.367%
-5.801%
-7.466%
-9.371%

11.50%

11.00%

10.50%

10.00%

9.50%

9.00%

8.50%

8.00%

7.50%

7.00%

6.50%

6.00%

5.50%

5.00%

4.50%

4.00%

3.50%

3.00%

2.50%

2.00%

$-

1.50%

0.00

Time
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

Cash Flow
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$
40.00
$ 1,040.00

Convexity:
PV of CF Price Weighted PV Convexity
$ 38.74
0.0349
0.0655
$ 37.52
0.0338
0.1904
$ 36.34
0.0328
0.3688
$ 35.20
0.0317
0.5954
$ 34.09
0.0307
0.8650
$ 33.02
0.0298
1.1728
$ 31.98
0.0288
1.5146
$ 30.97
0.0279
1.8860
$ 30.00
0.0270
2.2833
$ 29.05
0.0262
2.7029
$ 28.14
0.0254
3.1413
$ 27.25
0.0246
3.5956
$ 26.39
0.0238
4.0629
$ 25.56
0.0230
4.5403
$ 24.76
0.0223
5.0256
$ 23.98
0.0216
5.5164
$ 23.22
0.0209
6.0106
$ 22.49
0.0203
6.5063
$ 21.78
0.0196
7.0017
$ 548.57
0.4946
194.8732

Particulars
Bond Face Value
Bond Coupon
Years to Maturity
Coupon Frequency
Current Yield
Initial Price (P)
Semi Annual Convexity
Annual Convexity

Value
$
1,000.00
8%
10
2
6.50%
$
1,109.05
251.92
62.98

Convexity Corrected
$2,000.00
$1,500.00
$1,000.00
$500.00
$-

Price: Convexit

Convexity Based Price C

YTM
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%
10.50%
11.00%
11.50%

Change in YTM % Change in Price

-5.00%
42.90%
-4.50%
37.90%
-4.00%
33.06%
-3.50%
28.37%
-3.00%
23.85%
-2.50%
19.48%
-2.00%
15.27%
-1.50%
11.22%
-1.00%
7.32%
-0.50%
3.58%
0.00%
0.00%
0.50%
-3.42%
1.00%
-6.69%
1.50%
-9.80%
2.00%
-12.75%
2.50%
-15.54%
3.00%
-18.18%
3.50%
-20.66%
4.00%
-22.98%
4.50%
-25.14%
5.00%
-27.15%

Convexity Corrected vs. Theoretical Price

00

00

00

00

Price: Convexity Corrected

Convexity Based Price Correction

Price: Convexity Corrected Theoretical Price Error - Convexity
$
1,584.77 $
1,601.51
-1.045%
$
1,529.34 $
1,541.37
-0.780%
$
1,475.66 $
1,483.98
-0.561%
$
1,423.72 $
1,429.22
-0.385%
$
1,373.53 $
1,376.94
-0.248%
$
1,325.08 $
1,327.03
-0.147%
$
1,278.38 $
1,279.36
-0.077%
$
1,233.43 $
1,233.84
-0.033%
$
1,190.22 $
1,190.34
-0.010%
$
1,148.76 $
1,148.77
-0.001%
$
1,109.05 $
1,109.05
0.000%
$
1,071.08 $
1,071.06
0.001%
$
1,034.85 $
1,034.74
0.011%
$
1,000.38 $
1,000.00
0.038%
$
967.65 $
966.76
0.091%
$
936.66 $
934.96
0.182%
$
907.43 $
904.52
0.321%
$
879.93 $
875.38
0.520%
$
854.19 $
847.47
0.792%
$
830.19 $
820.74
1.151%
$
807.94 $
795.14
1.609%

Error Comparison
4.00%

-6.00%
-8.00%
-10.00%

Error - Convexity

Price: M-Duration Error M-Duration

$
1,497.46
-6.50%
$
1,458.62
-5.37%
$
1,419.78
-4.33%
$
1,380.94
-3.38%
$
1,342.10
-2.53%
$
1,303.25
-1.79%
$
1,264.41
-1.17%
$
1,225.57
-0.67%
$
1,186.73
-0.30%
$
1,147.89
-0.08%
$
1,109.05
0.00%
$
1,070.20
-0.08%
$
1,031.36
-0.33%
$
992.52
-0.75%
$
953.68
-1.35%
$
914.84
-2.15%
$
875.99
-3.15%
$
837.15
-4.37%
$
798.31
-5.80%
$
759.47
-7.47%
$
720.63
-9.37%

Error M-Duration

11.50%

11.00%

10.50%

10.00%

9.50%

9.00%

8.50%

8.00%

7.50%

7.00%

6.50%

6.00%

5.50%

5.00%

4.50%

4.00%

3.50%

-4.00%

3.00%

-2.00%

2.50%

1.50%

0.00%

2.00%

2.00%

11.50%

11.00%

10.50%

10.00%

9.50%

9.00%

Findings
Findings
Findings
Findings

1:
2:
3:
4:

The
The
The
The

actual price curve is convex to the origin. The price determined by Dura
error margin for Modified Duration Based price is very high and it increa
convexity corrected price is much closer to the actual theoretical price.
error increases for convexity corrected price as well if we move further

Comparison of Bond Prices

$1,800.00
$1,600.00
$1,400.00
$1,200.00
$1,000.00
$800.00
$600.00
$400.00
$200.00
$-

Price: M-Duration

Theoretical Price

The price determined by Duration is a straight line. The figure below depicts it.
rice is very high and it increases as we move away from the current YTM.
the actual theoretical price.
e as well if we move further away from the current YTM.

Convexity Corrected vs. T

Prices
$1,800.00
$1,600.00
$1,400.00
$1,200.00
$1,000.00
$800.00
$600.00
$400.00
$200.00
$-

l Price

Price: Convexity Correc

onvexity Corrected vs. Theoretical Price

Price: Convexity Corrected

Name: Aditya Banerjee

FPM in Finance
IIM Ranchi