Question

What is the convexity of a bond? List the steps followed in finding the convexity of a bond in Excel when built-in Excel functions are not used.

Answer 1

Convexity of bond is the measure of curvature of relationship between bond prices & bond yields that shows how duration of a bond changes as the rate of interest changes.

When built in functions are not used following formula is used:

Convexity of bond= ((P+)+(P-)-(2P₀)/(2*(P₀)(change in Y)²))

where,

P+ = Bond price when int rate is decremented

P-= Bond price when int rate is incremented

P_{0 =} Current bond price

Change in Y= Change in int rate represented in decimal form.