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Bond Math and Pricing
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Module 9
Second-Order Risk: Convexity
1
Limitations of Linear Duration for Large Yield Changes
Explain the limitation of the linear duration approximation for large yield changes.
2
Convexity: Second Derivative of Price-Yield
Define and derive Convexity as the second derivative of the price-yield function.
3
Bond Price Approximation: Duration & Convexity
Formulate the second-order Taylor expansion for bond price approximation using both duration and convexity.
4
Convexity in Bond Pricing: Python Implementation and Accuracy Comparison
Implement convexity calculation in Python and compare the accuracy of duration-only vs. duration-plus-convexity price estimates.
5
Visualizing Bond Price Approximations
Visualize the actual bond price function against the linear (duration) and quadratic (duration + convexity) approximations.
Previous module
Interest Rate Risk: Macaulay and Modified Duration
Next module
Practical Risk Management and Hedging Metrics