Common Misunderstandings Concerning Duration and Convexity

33 Pages Posted: 6 Apr 2007

See all articles by Timothy Falcon Crack

Timothy Falcon Crack

University of Otago - Department of Accountancy and Finance

Sanjay K. Nawalkha

University of Massachusetts Amherst - Isenberg School of Management

Abstract

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

Crack, Timothy Falcon and Nawalkha, Sanjay K., Common Misunderstandings Concerning Duration and Convexity. Available at SSRN: https://ssrn.com/abstract=977997 or http://dx.doi.org/10.2139/ssrn.977997

Timothy Falcon Crack (Contact Author)

University of Otago - Department of Accountancy and Finance ( email )

Dunedin
New Zealand

Sanjay K. Nawalkha

University of Massachusetts Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States
413-687-2561 (Phone)

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