Effective duration & convexity

[PMuir6307]

Which is nearest to, respectively, the effective duration and effective convexity of a 15- year bond that pays a 9.0% semi-annual compound and yields 12.0% per annum with semiannual compounding?

 

[David Harper CFA FRM]

Hi @PMuir6307 "Effective" implies you want to select a yield shock and re-price the bond. Here are my videos on each:

• https://forum.bionicturtle.com/threads/t4-34-fixed-income-effective-duration.22507/
• https://forum.bionicturtle.com/threads/t4-37-fixed-income-effective-convexity.22527/

I don't want to spoil the fun for you, but if you get stuck, I can give you the answer ...

 

[PMuir6307]

Thank you, I've been able to solve it. I applied shocks of plus and minus 1%. I wasn't sure how to get started, but these helped a lot.

 

[David Harper CFA FRM]

Thank you, I've been able to solve it. I applied shocks of plus and minus 1%. I wasn't sure how to get started, but these helped a lot.

what's your answer?!

 

[PMuir6307]

what's your answer?!

I got 7.3 years for effective duration and 81.02 years for effective convexity.