I am using Schweser, and in chapter 42, they calculate the convexity effect as: (0.5)(Convexity)(Change in yield squared)
However, in chapter 47, convexity effect is calculated as: (EC × Δy2 × 100)
Does anyone know why in one chapter they include the 0.5 and not include it in ther other chapter?
Is this something to do with the fact we are calculating absolute % change in bond price on pg.292, and then a return impact on pg.149. Therefore we are using slightly different convexity equations…?
WOuld be good to know the answer to this…I’m reading chapter 42 right now.
Yeah I really am not sure, and there are examples in each chapter where they use the two different formulas, so I am not sure which is correct.
Maybe the first forumla is for standard bonds, whereas the second one is strictly for asset backed securities?
Okay I think I have it now. In chapter 42, the formula covers modified duration (option free bond) whereas in chapter 47, the formula pertains to effective duration (bond with an option). That must be the difference in formulas
There’s actually no difference in the formulas, it’s just that you have to use apples to apples with what type of duration you are using. I think Level I explained it better than Level II.