A HIGHLY ACCURATE MEASURE OF BOND PRICE SENSITIVITY TO INTEREST RATES

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Keywords: duration, convexity, exponential duration, exponential convexity

Abstract

The objective of this research is to compare the method precision in the estimating bond price when the interest rate changes. By using 2 methods of the modified duration method are the duration & convexity method and the exponential duration & exponential convexity method. With 3 bond types such as par bond, zero coupon bond and perpetual bond.

The results suggest that the estimated price of bond by the modified duration method is highly accurate when interest rates changes only slightly. The duration & convexity method and the exponential duration method gives to be a little difference in most case of bond types and the difference is fairly small. While as interest rates increase, the duration & convexity method given the overestimation of price. On the other hand, the exponential duration method given the underestimation of price. The method that is the sum of exponential duration & exponential convexity is always the most accurate than all of previous method, which it is related to the research of Miles Livingston and Lie Zhou.

Published
2018-09-01
Section
Engineering and Technology Articles

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