Can you please provide the logic, derivation and explanation behind the formulas of:
- Effective Convexity
- Bond Convexity/Convexity Adjustment
as given in ICAI Study Material ?
I know that convexity measures the % change in Duration due to % change in Interest Rate. Also, I know that Modified Convexity’s (Although NOT covered in ICAI Study Material) formula can be derived through Second Order Derivative of Duration.
And also, why are the answers of Modified Convexity and Effective Convexity NOT exactly the same like the answers of Effective Duration and Modified Duration ?
You would find many detailed articles regarding the same on investopedia.
Can you please provide me with links of some relevant publications which I can follow ?