Bond Price Impact from Yield Change

CFA Level III Fixed Income
#1

Ok, made a prior (lengthier) post with the same root question but I am going to boil it down to a more simple Q…under 2 scenarios below.

  1. You have duration and convexity formulas, so if you know Duration and Convexity and you know the change in yield you can calculate the estimated price impact of the bond.

  2. But we also have a financial calculator with N, I/Y, PMT, FV, PV. Why not just change I/Y and see the impact to PV?

I am totally missing something I know, I have to be, but I’m getting a headache. The examples from Kaplan text show them using the financial calculator for the roll down yield when yields are lower. They just plop the lower yield into I/Y and see what PV is.

@S2000magician please help so I can focus on work today instead of this FI nuance!

#2

You can use your financial calculator for an option-free fixed rate bond, but not for a floating rate bond, or an inverse floating rate bond, or a callable bond, or a putable bond, or a mortgage-backed, or . . . .

The duration/convexity is an approximation that works quite well across a wide range of types of bonds; the financial calculator works perfectly for only one type of bond.

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