# Different Types of Income Essay

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Fixed-income or Bond products always witness itself as the cornerstone when it comes to the valuation of the weighing of the portfolio of an individual’s Investment. As the rough seas hits the shores, investors often seek comfort in Bonds or investing in fixed Income investments. Any kind of asset allocation plan would be negligent without a slight touch of fixed income, or Bond debt instruments. The analysis that a simple investor/ analyst would lay his hands across is relayed or explained below: Fixed income or Bond analysis is the mathematical valuation of Coupon paying Bonds debt Fixed securities, aligning the analysis of their, credit risk, interest rate riskand likely the pricing behavior, which are used for hedging portfolios. The…show more content…
This occurs because of the change in the benchmarked yield, or the changing yield spread. Duration is considered as a linear measure or the very 1st derivative measuring the price sensitivity of the value of the Bond changing with regard to the shocks provided to the interest rate. Although with a positive and negative shock to the interest rates via bps, the price does not change linearly, but rather it changes over some amount of curved function of the interest rates. The determination of the curvature is something that analyst delve into, but, we the lay man determine it by making tangency across the convex curve to accord it with price changes with that of the bps shocks. That is where, Convexity the 2nd derivative plays into the picture. It is a measure of the convex nature or the curvature of how the price sensitivity is determined within a frame of an interest rate, i.e. the changing duration of the fixed Income with the changing interest rate. The simplest of the Durations is the Efective Duration wherein the siimplified linear measure of the price sensitivity is measures across: (P2- P1)/ 2Po∆ Y Duration being the first derivative- dp/dr Convexity being the second derivative: d2p/dr2 Where the formula would go as: P2 +P1-2Po/ 2Po(∆y)2 The convexity adjustment would be given by: C*(∆Y)^2 % Convexity adjustments are always positive,