What is the difference between duration and convexity?

Duration measures the bond's sensitivity to interest rate changes. Convexity relates to the interaction between a bond's price and its yield as it experiences changes in interest rates. With coupon bonds, investors rely on a metric known as duration to measure a bond's price sensitivity to changes in interest rates.

What is convexity adjusted duration?

Convexity-adjusted duration combines duration and convexity to accurately measure a bond's price sensitivity to interest rate changes. By incorporating convexity, this metric accounts for the non-linear relationship between bond prices and interest rates, offering a more precise estimate of price changes resulting from rate fluctuations.

How do you calculate convexity of a bond?

For a Bond of Face Value USD1,000 with a semi-annual coupon of 8.0% and a yield of 10% and 6 years to maturity and a present price of 911.37, the duration is 4.82 years, the modified duration is 4.59, and the calculation for Convexity would be: Annual Convexity : Semi-Annual Convexity/ 4= 26.2643Semi Annual Convexity : 105.0573