Convexity adjustment

To estimate the price change of a bond due to a large change in its yield-to-maturity, convexity adjustment should be done to account for the convex curve relationship between a bond’s price and its yield-to-maturity.

%Δprice = -ModDur x ΔYTM + ½convexity x (ΔYTM)2

Approximation:

%Δprice = – ApproxModDur x ΔYTM + ½ ApproxCon x (ΔYTM)2

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