Hi. The that % change in a bond price using duration and convexity has two formula’s. In reading 42 the convexity is divided by 2 and added to duration, whereas the convexity is not divided by 2 in reading 47. Can anyone explain why?
Both are right.
Frank Fabozzi who wrote reading 43 & 44 explains it like this…
…ie the bond market has not fully agreed to a standard convention.
The formula for effective convesity p 352 in reading is divding by 2. Therefore if the convexity is coming from this formula you should not divide by 2 when you are applying it to calculate the the price effect of af interest rate change.
rgs Henning Hansen
I’m having trouble with this also… and I’m afraid the above didn’t help… anyone?
Use the search function - this has been discussed several times even within the past two weeks.