A Revised Closed-Form Solution for Bond Convexity
5 Pages Posted: 24 May 2018
Date Written: May 7, 2018
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