A Revised Closed-Form Solution for Bond Convexity
5 Pages Posted: 24 May 2018
Date Written: May 7, 2018
Abstract
Since duration works best for only small changes of the interest rate, convexity helps to improve the estimation accuracy. Traditionally, convexity is displayed with a formula, which depends on the number of outstanding payments. Closed-form solutions do exist, typically building on the work of Chua (1984). Based on the slightly different approach of Kruschwitz and Schöbel (1986a), who also developed a closed-form equation for the duration, I derive a shorter closed-form solution for convexity than previously known.
Keywords: Bonds, Duration, Convexity, Closed-Form Solution
JEL Classification: G12
Suggested Citation: Suggested Citation
Scholz, Peter, A Revised Closed-Form Solution for Bond Convexity (May 7, 2018). Available at SSRN: https://ssrn.com/abstract=3176015 or http://dx.doi.org/10.2139/ssrn.3176015
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