What is the difference between using the Convexity measure as opposed to using the Duration formula for debt investments? Which is a better method? BTW, does anyone know if there is a website to get calculator tips

I don’t think convexity can be used on its own. My understanding is that it’s a correction made for the convexity of the price-yield curve. Since duration is basically a straight line measure of price change applied to a curvi-linear relationship, it loses accuracy as the magnitude of the change in yield increases; the introduction of the convexity measure in conjunction with duration improves the accuracy.

duration is first derivative of price wrt interest rate. convexity is the second.

Yes, you only start to consider convexity after you have accounted for the effects of duration. You shouldn’t consider convexity on its own as far as I know.

duration = velocity convexity = acceleration

DarienHacker Wrote: ------------------------------------------------------- > duration is first derivative of price wrt interest > rate. convexity is the second. yes, cause he doesn’t understand the difference, but the derivative explanation is going to help…

Think of the chart of a bond price vs interest rate. It is a downward CURVE. Duration is a LINEAR approximation for a the change in bond price for a small movement in interest rate. Convexcity is used to provide better estimation of the bond price given change in interest rate.

MFE Wrote: ------------------------------------------------------- > duration = velocity > convexity = acceleration Flashback to my freshmen’s year in college.