Page 19 - FINAL CFA SLIDES DECEMBER 2018 DAY 15
P. 19
LOS 54.h: Calculate and interpret approximate
convexity and distinguish between approximate Session Unit 16:
and effective convexity., p111 54. Understanding Fixed Income Risk and Return
tanties
where:
the variables are the same as those we used in
calculating approximate modified duration.
Effective convexity, like effective duration, must be used for bonds with embedded options.
A bond’s convexity is increased or decreased by the
same bond characteristics that affect duration. A
longer maturity, a lower coupon rate, or a lower
yield to maturity will all increase convexity, and vice
versa. For two bonds with equal duration, the one
with cash flows that are more dispersed over time
will have the greater convexity.
