Bond convexity - Part 3
Quantitative Finance
Level
3
A bond has the following prices at different yields
| Yield (in %) | Price (in $) |
| 7 | 1050.25 |
| 8 | 1000 |
| 9 | 951.3 |
What is the effective convexity of the bond at an 8 % yield?
The answer is 15.50.
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Convexity is defined as P''/P, where the second derivative is taken with respect to yield. Using the approximation ((P(0.07) - 2P(0.08) + P(0.09))/(0.01)^2 = 15500 for the second derivative, we find an effective convexity of 15.5.