The Kaplan Book is driving me crazy, especially after finding a few common math/sence errors in the text. What is the correct formula to use inorder to solve this question the text of the book gives :%Δ bond value = –duration(ΔYTM) + 1/2 convexity(ΔYTM)^2 then soves the question with: duration(ΔYTM) + 2[convexity(ΔYTM)]… Am I loosing my noodle? Thanks for any assistance.
Assume a bond has an effective duration of 10.5 and a convexity of 97.3. Using both of these measures, the estimated percentage change in price for this bond, in response to a decline in yield of 200 basis points, is closest to:
This is an internal inconsistency in the CFA Institute materials; it isn’t Schweser’s fault.
In the finance world, there’s disagreement about whether the ½ should be included in the convexity number itself, or should not be included (requiring that you multiply by ½ when using convexity). Either approach is workable; what’s stupid is to do it one way one time and the other way the next time.
That’s what CFA Institute has done: they present the formula with the ½ not included in the convexity number (thus, included in the formula) in the reading on credit analysis, and the formula with the ½ included in the convexity number in the rest of the Fixed Income curriculum.
So, the correct answer depends on where the question originated: credit analysis, include the ½ in the formula; anywhere else, don’t include the ½ in the formula.