Using Convexity to Approximate Bond Price Change

Monday, December 3, 2012 at 1:00pm to 1:45pm

Bronfman Science Center, 106 18 Hoxsey St, Williamstown, MA 01267, USA

Using Convexity to Approximate Bond Price ChangeJack Ervasti '13
Mathematics and Statistics Department Colloquium

Abstract: This talk will investigate methods for approximating bond price change. Using the Taylor Theorem from calculus, we will first derive the formula for duration, which is the most commonly used approximation. We will then introduce the second order approximation, the convexity measure, and compare the two methods through real world examples such as portfolio immunization and the pricing of interest rate swaps.

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Mathematics & Statistics

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