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Effective Convexity Formula

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Effective Convexity is a measure used in bond investing to assess the sensitivity of a bond's duration to changes in interest rates. Check FAQs

EC = \frac{PV - + PV + - (2 \cdot P o)}{{(ΔC)}^{2} \cdot P o}

EC - Effective Convexity?PV_- - Price of Bond When Yield is Decreased?PV₊ - Price of Bond When Yield is Increased?P_o - Initial Price of Bond?ΔC - Change in Curve?

Effective Convexity Example

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Here is how the Effective Convexity equation looks like with Values.

Here is how the Effective Convexity equation looks like with Units.

Here is how the Effective Convexity equation looks like.

1.4522 = \frac{19405 + 470 - (2 \cdot 135)}{{(10)}^{2} \cdot 135}

1.4522 = \frac{19405 + 470 - (2 \cdot 135)}{{(10)}^{2} \cdot 135}

1.4522 = \frac{19405 + 470 - (2 \cdot 135)}{{(10)}^{2} \cdot 135}

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Effective Convexity Solution

Follow our step by step solution on how to calculate Effective Convexity?

FIRST Step Consider the formula

EC = \frac{PV - + PV + - (2 \cdot P o)}{{(ΔC)}^{2} \cdot P o}

Next Step Substitute values of Variables

∴

EC = \frac{19405 + 470 - (2 \cdot 135)}{{(10)}^{2} \cdot 135}

Next Step Prepare to Evaluate

∴

EC = \frac{19405 + 470 - (2 \cdot 135)}{{(10)}^{2} \cdot 135}

Next Step Evaluate

∴

EC = 1.45222222222222

LAST Step Rounding Answer

∴

EC = 1.4522

Effective Convexity Formula Elements

Variables

Effective Convexity

Effective Convexity is a measure used in bond investing to assess the sensitivity of a bond's duration to changes in interest rates.

Symbol: EC

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Effective Convexity

Price of Bond When Yield is Decreased

Price of Bond When Yield is Decreased refers to the new price of the bond after a hypothetical reduction in the yield or interest rate.

Symbol: PV_-

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Price of Bond When Yield is Decreased

Price of Bond When Yield is Increased

Price of Bond When Yield is Increased refers to the new price of the bond after a hypothetical increase in the yield or interest rate.

Symbol: PV₊

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Price of Bond When Yield is Increased

Initial Price of Bond

Initial Price of Bond is the price of the bond at the beginning of the fiscal year.

Symbol: P_o

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Initial Price of Bond

Change in Curve

Change in Curve refers to movements or shifts in the yield curve, which is a graphical representation of the relationship between interest rates and different maturities of debt securities.

Symbol: ΔC

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Change in Curve

Other formulas in Strategic Financial Management category

Go Earnings Yield

EY = (\frac{EPS}{MPS}) \cdot 100

Go Earnings Yield using PE Ratio

EY = (\frac{1}{PE}) \cdot 100

Go Dividend Rate

DR = (\frac{DPS}{CP}) \cdot 100

Go Share Exchange Ratio

ER = \frac{OPTS}{ASP}

How to Evaluate Effective Convexity?

Effective Convexity evaluator uses Effective Convexity = (Price of Bond When Yield is Decreased+Price of Bond When Yield is Increased-(2*Initial Price of Bond))/((Change in Curve)^2*Initial Price of Bond) to evaluate the Effective Convexity, Effective Convexity measures the curvature of the relationship between a bond's price and interest rates, considering changes in cash flows due to embedded options. Effective Convexity is denoted by EC symbol.

How to evaluate Effective Convexity using this online evaluator? To use this online evaluator for Effective Convexity, enter Price of Bond When Yield is Decreased (PV_-), Price of Bond When Yield is Increased (PV₊), Initial Price of Bond (P_o) & Change in Curve (ΔC) and hit the calculate button.

FAQs on Effective Convexity

What is the formula to find Effective Convexity?

The formula of Effective Convexity is expressed as Effective Convexity = (Price of Bond When Yield is Decreased+Price of Bond When Yield is Increased-(2*Initial Price of Bond))/((Change in Curve)^2*Initial Price of Bond). Here is an example- 1.452222 = (19405+470-(2*135))/((10)^2*135).

How to calculate Effective Convexity?

With Price of Bond When Yield is Decreased (PV_-), Price of Bond When Yield is Increased (PV₊), Initial Price of Bond (P_o) & Change in Curve (ΔC) we can find Effective Convexity using the formula - Effective Convexity = (Price of Bond When Yield is Decreased+Price of Bond When Yield is Increased-(2*Initial Price of Bond))/((Change in Curve)^2*Initial Price of Bond).

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Effective Convexity Formula

Effective Convexity Example

Effective Convexity Solution

Effective Convexity Formula Elements

Other formulas in Strategic Financial Management category

How to Evaluate Effective Convexity?

FAQs on Effective Convexity

Variable Name