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We can measure the convexity with the help of following formula:
...Eq. (4)
Where,
Δy = Change in yield in decimal.
V0 = Initial price.
V- = Price if yields decline by Δy.
V+ = Price if yields increase by Δy.
It is necessary to understand following three points related to this convexity measure:
Convexity doesn't have a simple interpretation as in the case of a duration.
The value calculated in equation (4) is more popularly referred to as a "convexity of a bond" rather than the "convexity measure of a bond".
Last, the convexity measure reported by the dealers and vendors will differ for an option-free bond.
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