Common Misunderstandings Concerning Duration and Convexity
33 Pages Posted: 6 Apr 2007
In our experience, most finance students are unnecessarily confused by the roles that duration and convexity play in the traditional textbook plot of bond price versus bond yield. The slope of the bond price-yield plot does not define bond duration, and the curvature of the bond price-yield plot does not define bond convexity. We demonstrate several common misunderstandings regarding duration and convexity, and we offer a new bond return-yield plot for illustrating the roles of duration and convexity.
Keywords: Duration, Convexity, Bond return, Bond price, yield
JEL Classification: A0, G0, G10, G11, G12, G21
Suggested Citation: Suggested Citation