What is Convexity Adjustment ?
Convexity adjustment refers to a correction made to the estimated change in a bond's price due to fluctuations in interest rates. While duration provides a good estimate of how a bond's price will move in response to changes in yield, it does not account for the curvature in the price-yield relationship. Convexity adjustment is necessary because bonds exhibit convexity, meaning their price-yield relationship is not perfectly linear. When interest rates change, bond prices may not move exactly as predicted by duration alone; convexity adjustment accounts for this nonlinear relationship. Essentially, convexity adjustment refines the estimation of bond price changes by incorporating the curvature in the price-yield curve, providing a more accurate picture of how bond prices respond to changes in interest rates.
How to Calculate Convexity Adjustment?
Convexity Adjustment calculator uses Convexity Adjustment = Bond's Convexity*(Change of Yield^2)*100 to calculate the Convexity Adjustment, The Convexity Adjustment is a refinement made to bond price change estimates to account for the nonlinear relationship between bond prices and yields. Convexity Adjustment is denoted by CA symbol.
How to calculate Convexity Adjustment using this online calculator? To use this online calculator for Convexity Adjustment, enter Bond's Convexity (BC) & Change of Yield (Δy) and hit the calculate button. Here is how the Convexity Adjustment calculation can be explained with given input values -> 0.28 = 7*(0.02^2)*100.