Duration provides a good approximation of changes in the price of an option-free bond, when the change in yield is relatively small. However, for large changes in yield a convexity adjustment needs to be incorporated. With the aid of your own fully annotated diagram, discuss the statement above and address why a convexity adjustment is necessary.

Answer rating: 100% (QA)

Duration is the average PV value with the weight of the coupon and the princip... View the full answer