Fixed Income Analysis

Duration-Convexity

In this workbook, you will learn how to calculate the folowing for a plain vanilla
coupon bond:
i. Market Price
ii.Macaulay Duration
iii.Modified Duration
iv.Convexity

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Analysis

ll learn how to calculate the folowing for a plain vanilla

om to download more spreadsheets from our Xcel in

Workbook Series

Question

Consider a 5 year United States Treasury Note. Its coupon is 10%. The current market
rate is 5%. If its face value is $100, compute the following:
a. Market Price
b. Macaulay Duration
c. Modified Duration

Duration
Coupon
Face Value
Tenure
Market Rate

USD
Years

10%
100
5
5%
1-Jan-10
Year 0

Years of Cash Flow

Discount Factor

1/(1+y)^t
1/(1+y)^(t+1)
1/(1+y)^(t+2)

Cash Flows from the Bond

Coupons
Face Value
Total Cashflow from the Bond

150

Present Value of Cash flows from the Bond

USD

Duration Calculations
% of the Cash Flows this Year
Duration Contribution of the Year
Duration of the Bond

121.65

Years

4.25

Modified Duration
Modified Duration Using Excel Formula

4.05
4.05

Convexity Calculations
Convexity Contribution of the Year
Convexity of the Bond

8.0

21.83

Duration vs. Tenure

7.0

Market Rate
@ 10%

5.0
4.0

Market Rate
@ 1%

3.0
2.0

1.0

Market Rate

6.0

5.1
5.0
4.9
4.8

10

Macaulay Duration
Coupon Rate

Coupon Rate

4.8
4.7
4.6
4.5
4.4
4.3
4.2
0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1-Jan-11
Year 01
1.0
0.9
0.9

1-Jan-12
Year 02
0.9
0.9
0.8

31-Dec-12
Year 03
0.9
0.8
0.8

1-Jan-14
Year 04
0.8
0.8
0.7

1-Jan-15
Year 05
0.8
0.7
0.7

1-Jan-16
Year 06
0.7
0.7
0.7

31-Dec-16
Year 07
0.7
0.7
0.6

10
10

10
10

10
10

10
10

10
100
110

8%
0.08

7%
0.15

7%
0.21

7%
0.27

71%
3.54

0%
0.00

0%
0.00

0.07

0.14

0.20

0.26

3.37

17

49

94

149

2,345

Check by changing the yield to 9.99%. Price must change to

100.0379

Modified
Duration

Tenure of the Bond

4.05
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%

1
1.0
1.0
1.0
1.0
1.0
0.9
0.9
0.9
0.9
0.9

Macaulay
Duration
0%
1%

4.25
5.0
4.9

2
1.9
1.9
1.9
1.8
1.8
1.8
1.8
1.8
1.8
1.7

3
2.7
2.7
2.7
2.6
2.6
2.6
2.6
2.5
2.5
2.5

4
3.5
3.5
3.4
3.4
3.4
3.3
3.3
3.2
3.2
3.2

5
4.3
4.2
4.2
4.1
4.1
4.0
3.9
3.9
3.8
3.8

6
5.0
4.9
4.8
4.8
4.7
4.6
4.6
4.5
4.4
4.4

2%
3%
4%
5%
6%
7%
8%
9%

4.8
4.7
4.6
4.5
4.5
4.4
4.4
4.3

1-Jan-18
Year 08
0.7
0.6
0.6

1-Jan-19
Year 09
0.6
0.6
0.6

1-Jan-20
Year 10
0.6
0.6
0.6

0%
0.00

0%
0.00

0%
0.00

7
5.7
5.6
5.5
5.4
5.3
5.2
5.1
5.0
5.0
4.9

8
6.3
6.2
6.1
6.0
5.9
5.8
5.7
5.5
5.4
5.3

9
7.0
6.8
6.7
6.5
6.4
6.3
6.1
6.0
5.9
5.8

10
7.6
7.4
7.2
7.1
6.9
6.8
6.6
6.4
6.3
6.1