Fixed income fundamentals, bond pricing under continuous compounding, duration, convexity, common errors with duration and convexity
Reading Abstract:
This chapter introduces pricing non-defaultable bonds and could be used as a good quick reference. The chapter explains how bond prices are exposed to interest rate volatility and how the concepts of duration and convexity describe that relationship. This reading is targeted toward undergraduate students and junior practitioners looking for an introduction to fixed income valuation. Formulas are well-explained, easy to follow and coupled with simple examples.
Reading Contents:
2.1 Bond price under continuous compounding
2.2 Duration
2.3 Convexity
2.4 Common fallacies concerning duration and convexity
2.4.1 Simple counter examples
2.4.2 Explanations of the fallacies
2.4.3 Applications to callable bonds
2.4.4 A new graph
2.5 Formulas for duration and convexity
2.5.1 Duration and convexity formulas for regular bonds
2.5.2 Duration and convexity formulas for annuities and perptuities
App. 2.1 Other fallacies concerning duration and convexity
Notes
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Book Review:
*** From the publisher ***
The definitive guide to fixed income valuation and risk analysis.
The Trilogy in Fixed Income Valuation and Risk Analysis comprehensively covers the most definitive work on interest rate risk, term structure analysis, and credit risk. The first book on interest rate risk modeling examines virtually every well-known IRR model used for pricing and risk analysis of various fixed income securities and their derivatives. The companion CD-ROM contain numerous formulas and programming tools that allow readers to better model risk and value fixed income securities. This comprehensive resource provides readers with the hands-on information and software needed to succeed in this financial arena.
