Essay about Calculate Convexity

658 Words Oct 14th, 2014 3 Pages
Running Head: Calculate Convexity

Calculate Convexity

Leann Joseph

Southern New Hampshire University

Author Note:

This short paper was done as an assignment in fulfillment of the requirements for: Southern New Hampshire University’s FIN 645 Analytical Tools in Portfolio 14TW3

Running Head: Calculate Convexity 3-2 Assignment Using an Excel spreadsheet, calculate the convexity for the two bonds you selected for the Module Two Assignment. Conduct an analysis of their duration and convexity and expound on the difference between the two concepts. Since I did not choose two bonds in Module Two Assignment, I considered the following bonds:

**Using the dollar value of the bond and a $1000 face value,
I considered a bond that
…show more content…
The prediction for a given increase in yield does not remain true for a given decrease in yield.

Considering the following bond: Coupon Rate - 4% 5 year maturity Priced to yield -5% The value of the bond is as follows:

Running Head: Calculate Convexity The calculation of duration and convexity: Year t Cash Flow (1+i)^t PV of cash flow Timeweighted PV cash flow 0.97561 1.90363 2.78580 3.62380 4.41927 5.17378 5.88886 6.56597 7.20656 398.41118 436.95446 (1+i)^2 t^2+t Change of change

0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 Sum

1 2 3 4 5 6 7 8 9 10

2 2 2 2 2 2 2 2 2 102

1.02500 1.05063 1.07689 1.10381 1.13141 1.15969 1.18869 1.21840 1.24886 1.28008

1.95122 1.90363 1.85720 1.81190 1.76771 1.72459 1.68253 1.64149 1.60146 79.68224 95.62397

1.05063 1.05063 1.05063 1.05063 1.05063 1.05063 1.05063 1.05063 1.05063 1.05063

2 6 12 20 30 42 56 72 90 110

3.7144 10.8714 21.2125 34.4919 50.4759 68.9427 86.6816 112.4926 137.1861 8342.6970 8871.7660

Current value is 95.62397 If yield increases by 1%, value is 91.46980

Bodie Z., Zane A. and Marcus AJ. 1996. Investments. Third Edition. Irwin/McGraw-Hill. Jones CP. 1998. Investments. Sixth Edition. John Wiley & Sons. Sharpe WF, Alexander G. and Bailey JV. 1999. Investments. Sixth Edition. Prentice- Hall. Macaulay F. 1938. Some theoretical problems suggested by the movements of interest rates, bond yield, and stock prices in the United States since 1856. New York: National
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