Convexity, Financial Management

Duration is good measure while estimating the percentage price change for a small change in interest rates but the estimation becomes inferior with the larger change in interest rate. Therefore, duration is only a good approximation of the percentage price change for small changes in yield. The reason for this is, duration is a first approximation for a small change in yield. By using a second approximation it can be improved. This approximation is known as a convexity. We can use convexity measure of the security to approximate the change in price that is not explained by duration.        

Posted Date: 9/10/2012 5:22:35 AM | Location : United States







Related Discussions:- Convexity, Assignment Help, Ask Question on Convexity, Get Answer, Expert's Help, Convexity Discussions

Write discussion on Convexity
Your posts are moderated
Related Questions
I just purchased a stock that would pay the dividends of the first four years as D1 = $0.65, D2 = $0.74, D3 = $0.79, D4 = $0.84. I also told that the dividends would grow continual

Demerits of Pay Back Method:- (i) It ignores the Cash Flows after the Pay Back Period: - The main shortcoming of this method is that it completely ignores all cash inflows subs


Explain the Benefits of benchmarking - Better understanding of business, competition and customers. - Improves business performance and discourages complacency. - Good wa

Floor Brokers These people have the responsibility of executing the trades forwarded by the FCMs on the floor of the exchange. They can also trade for their own account. They w

Explain Dual Currency Bond A dual currency bond is a straight fixed-rate bond that is issued in one currency and pays coupon interest in that similar currency.  At maturity, th

AGENCY THEORY An agency relationship may be defined as a contract under which one or more people (the principals) hire another person (the agent) to perform some services on th

Does is make any sense to calculate betas against local indexes when a company has a great part of its operations outside this local market? Both the betas calculated against l

Q. Explain Dividend Policy Decision? Dividend Policy Decision: - The financial management has to make a decision as which portion of the profits is to be distributed as dividen

Given below are the cash flows of a project. Find out the net present value of the project. Cost of capital is 18% and initial investment is Rs. 2,00,000. Year Cash Flows (lakhs)