Question

Discuss the discrepancy between the price-yield curve and the duration.

Answer 1

Price to yield curve is a representation of how the price of the bond changes as the yield on the bond changes. This measure is an accurate measure of price change, the price that is new price is accurate. Duration is a measure of interest rate sensitivity for the bond however it measures an approximate change in the price of the bond in terms of percentage. The price percentage change shown by the duration rule with change in yield is approximate and not accurate. The duration along with convexity method is more appropriate as it improves slightly and it is closer to the accurate price change. The percentage change in price calculated by the duration along with convexity method is more appropriate than duration rule being used alone.