Chapter 11 Excel Application: Convexity
1. Calculate the convexity of a “bullet” fixed income portfolio, that is, a portfolio with a
single cash flow. Suppose a single $1,000 cash flow is paid in year 5.
[Change cells: 6 0; 8 5; 10 100; 15 0]B B D D= = = =
This adjusts removes any periodic payments prior to maturity and adjusts maturity to 5 years and
reflects the single payment of $1,000 (note that cash flows are inputted as percentages, so 100 is
appropriate rather than 1000).
2. Now calculate the convexity of a “ladder” fixed income portfolio, that is, a portfolio with
equal cash flows over time. Suppose the security makes $100 cash flows in each of years
1 – 9, so that its duration is close to the bullet in part a.
[Change cells: 6 10; 8 9; 10 ; 15 0]B B B coup B= = == =
1
This adjusts the payments to equal $100 payments in years 1-9. Duration will be similar to that
of part a.
Next, specify a YTM. Answers may vary here. Assume a YTM of .045:
3. Do ladders or bullets have greater convexity?
Note the output from questions 1 and 2. The convexity of the bullet is 27.47 while the convexity
of the ladder is 30.66. Ladder will have greater convexity, since convexity increases with the