Percentage price change

Property 1 Although the price moves in the opposite direction from the change in required yield, the percentage price change is not the same for all bonds. [Pg.100]

Property 2 For small changes in the required yield, the percentage price change for a given bond is roughly the same, whether the required yield increases or decreases. [Pg.100]

EXHIBIT 4.12 Instantaneous Percentage Price Change for Four Hypothetical Bonds (Initial Yield for all four bonds is 7%)... [Pg.101]

While the properties are expressed in terms of percentage price change, they also hold for euro price changes. [Pg.101]

In order to approximate the percentage price change for a given change in yield and a given duration, we employ the following formula ... [Pg.111]

For example, consider once again the UK gilt principal strip whose duration we just computed is 17.636. The approximate percentage price change for a 10 basis point increase in the required yield (i.e.. Ay = +0.001) is... [Pg.111]

Now let ns examine how well duration does in estimating the percentage price change when the yield increases by 200 basis points rather than a 10 basis points. In this case. Ay is eqnal to +0.02. Substitnting into equation (4.2) we have... [Pg.112]

EXHIBIT 4.20 Application of Duration to Approximate the Percentage Price Change... [Pg.113]

Earlier we used the graph of the price/yield relationship to demonstrate the price volatility properties of bonds. We can use graphs to illustrate what we observed in our examples about how duration estimates the percentage price change, as well as some other noteworthy points. [Pg.114]

We demonstrated this property earlier using a UK gilt principal strip priced to yield 4.435% with a duration of 17.631. For a 10 basis point change in yield, the estimate was accurate for both an increase and decrease in yield. However, for a 200 basis point change in yield the approximate percentage price change was off considerably. [Pg.132]

Given the convexity measure, the approximate percentage price change adjustment due to the bond s convexity (i.e., the percentage price... [Pg.133]

For example, for the UK gilt principal strip, the convexity adjustment to the percentage price change based on duration if the yield increases from 4.435% to 5.435% is... [Pg.133]

The approximate percentage price change based on duration and the convexity adjustment is found by summing the two estimates. So, for example, if yields change from 4.435% to 5.435%, the estimated percentage price change would be... [Pg.133]

For a decrease of 100 basis points, from 4.435% to 3.435%, the approximate percentage price change would be as follows ... [Pg.133]

The convexity adjustment is —1.2% and therefore the bond exhibits the negative convexity property illustrated in Exhibit 4.18. The approximate percentage price change after adjusting for convexity is... [Pg.134]

Convexity adjustment to percentage price change = (Convexity measnre/2) x (Ay) x 100... [Pg.135]

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