The tangent line is strongly related to duration; both estimate the rate of change in price. After the first percentage change in price, what is used to approximate the second and added to the duration?

Question

Quizplus · Accepted Answer

After the first percentage change in price, convexity is used to approximate the second and added to the duration; this price-yield relationship that can be represented by a tangent line. The tangent line shows the rate of change in price to changes in yield. How curved the path actually is depends on the degree of convexity. The distance between the tangent line (estimated price) and the curvature of the actual path (actual price) is the error in estimating price based on duration. If the degree of convexity is measured, the price of a bond can be estimated with more accuracy.

The Tangent Line Is Strongly Related to Duration; Both Estimate