Exam 9: Duration and convexity explain a local bond-price approximation
Duration provides a first-order yield sensitivity; convexity adds a second-order term under a specified yield change. Cash-flow timing and yield conventions matter. A local approximation does not capture every investment or insurance risk.
Worked example or practice scenario
With modified duration 6 and convexity 50, a +.01 yield move gives approximate ΔP/P = −6×.01 + .5×50×(.01)² = −5.75%. Omitting convexity gives −6%. These assumed sensitivities are for an original illustration.
Try this next
Compare with exact repricing of a simple bond. State whether convexity uses the matching rate convention. Explain why non-parallel curve changes, credit spread changes or options can require more than a single duration-and-convexity pair.
Reading sources
ActNet editorial guide · October 1, 2026 · Original illustrative examples.