Why do we have to decimalize change in yield when multiplying by Modified Duration?
(–MD × ΔY) + (½ × C × ΔY2)
A ModDur of 5 = 5% change in value per 1% change in yield I thought? Wouldn’t we multiply by a percentage, not a decimal?
I think you’re right. A bond with a modified duration of 5 years would be expected to experience a 5% change in price for a 1% change in yield. If interest rates were to rise by 1%, the price of the bond would be expected to decline by approximately 5% which is -5*1%.
HI,
That is fine when you are working with just the duration and you know how to interpret the answer
But if you look at the second half of the quation
(½ × C × ΔY^2)
You have change in yield squared. You are going to get the wrong convexity effect if you use whole numbers
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