Duration / Convexity

Schweser has a bunch of question in qbank asking for calcs on these two bastards. But there is no LOS saying we need to calculate them; only “analyze” and “illustrate.” Should I add these to my flashcard pile? It is getting pretty thick.

Just memorise them… once you know one you’ll know the other!

i rote-memoried this… basically remember duration, which is easy… then convexity… subtract 2Vo from numerator. mult by chY on bottom. i don’t trust them when they say you don’t need formula or calc… obviously there are limits to memory and/or time on exam (i.e. some calcs won’t be there for sure… like TB’s 10+ equations)

underlying theory is testable – want small duration and large convexity…

Absolutely memorize them. I noticed that even with LOS that do not ask for a calculation, you still need to know the formula in case you get a question like: “An anaylst is explaining to his friend a particular fixed-income calculation. He tells him to take the value of the bond with rates moved lower minus the value of the Bond with rates moved higher divided by the product of 2 times the beginning bond value times the change in the interest rates.” Is the anaylst explaining duration, convexity, or both?

Eff Duration = [(V-) - (V+)] / (2*Vo*DeltaY) Eff Convexity = [(V+) + (V-) - (2*Vo)] / (2*Vo*DeltaY^2) % Change in Bond Price = - (DeltaY)*(Eff Duration) + (DeltaY^2)*(Eff Convexity) That’s all there is to it. Easy to remember / all from Level 1.