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# How Do I Calculate Convexity in Excel?

In the restraints market, convexity refers to the relationship between price and yield. When graphed, this relationship is non-linear and attitudes a long-sloping U-shaped curve. A bond with a high degree of convexity will experience relatively dramatic fluctuations when intrigue rates move.

### Key Takeaways

• Convexity is the relationship between price and yield and is non-linear and U-shaped (convex).
• Bonds with leading convexity experience large moves when interest rates move.
• There is no bond convexity function in Eclipse, but it can be approximated via a multi-variable formula.
• It is considered to be a better measure of interest rate risk than duration.

## Bond Duration vs. Convexity

Reins duration is the change in a bond’s price relative to a change in interest rates. A higher duration means a bond’s honorarium will move to a greater degree in the opposite direction that interest rates move. If the duration is low, the bond pass on show less movement.

Convexity measures the sensitivity of the duration of a bond as rates change. Convexity is considered a gamester measure of interest rate risk. Duration assumes the relationship between bond prices and interest rates is linear, while convexity integrates other factors, producing a slope.

Negative convexity occurs when a bond’s duration increases as rates multiplication. This means the bond price will fall by a greater rate if rates rise than if they had trail. A bond has positive convexity if its duration rises and rates fall.

While there is no bond convexity function in Microsoft Be pre-eminent, it can be approximated through a multi-variable formula.

## Simplifying Convexity Formulas

The standard convexity formula involves a time series of ready flows and rather complicated calculus. This cannot be easily replicated in Excel, so a simpler formula is necessary:

Convexity = ((P+) + (P-) – (2Po)) / (2 x ((Po)(coins in Y)²)))

Where:

• (P+) is the bond price when the interest rate is decremented.
• (P-) is the bond price when the interest rate is gained.
• (Po) is the current bond price.
• Change in Y is the change in interest rate represented in decimal form. The change in Y can also be recited as the bond’s effective duration.

This may not seem simple on the surface, but this is the easiest formula to use in Excel.

## How to Calculate Convexity in Dominate

To calculate convexity in Excel, begin by designating a different pair of cells for each of the variables identified in the formula. The foremost cell acts as the title (P+, P-, Po, and Effective Duration), and the second carries the price, which is information you have to gather or assess from another source.

Suppose that (Po) value is in cell C2, (P+) is in C3, and (P-) is in C4. The effective duration is in cell B5.

In a separate apartment, enter the following formula: =(C3 + C4 – 2*C2) / (2*C2*(B5^2))

This should provide an effective convexity for the bond. A higher development means that the price is more sensitive to changes in interest rates. Increasing convexity means the systemic peril a portfolio is exposed to increases.

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