A convexity measure that captures the the approximate change in a bond‘s dollar price that is not explained by duration.
Dollar convexity= convexity × initial bond price
The dollar price change that is caused by convexity can be calculated, using dollar convexity, as follows:
Dollar price change= ½ × dollar convexity × (yield change)2
For example, if a bond’s convexity and price are 9.5 and 100, respectively. It follows that its dollar convexity is:
Dollar convexity= 9.5× 100 = 950
Using dollar convexity, and assuming a 350 basis point change in yield (i.e., 3.5%), the dollar price change is:
Dollar price change= ½ × 950 × (3.5%)2 = 0.4275
This means the bond’s convexity is responsible for a dollar price change of 0.4275.
Dollar convexity measures the dollar value of the curvature of the price/yield curve.
