Closed-Form Solutions of Convexity and M-Square
7 Pages Posted: 23 May 2009
Date Written: January 23, 1990
Closed-form formulas for Macaulay duration, as given by Babcock and Chua, provide the user with a less cumbersome and more efficient procedure for calculating duration. Recent developments, however, have suggested alternative measures of bond portfolio immunization designed to overcome the severe restrictions that Macaulay duration places on permitted interest rate behavior. This note presents closed-form formulas for two such alternative measures - convexity and M-square and demonstrates how these measures can be used in an immunization strategy.
Keywords: bond convexity, M-square, interest rates, immunization, interest rate risk
JEL Classification: G10, G11, G12, G13, G21, G22, G23
Suggested Citation: Suggested Citation