Finance Lab
A formula is not a fact. It is a decision.
Each experiment walks the same six stages: read the formula, understand what it claims, manipulate the variables, observe the sensitivity, solve for a target, then apply it to a decision.
Investments
Bond duration and interest-rate risk
dP/P ~ -Modified duration x dy + 1/2 x Convexity x dy^2
Price tells you what a bond is worth today. Duration tells you how much that price moves when yields change, and convexity corrects the estimate for larger moves.
What each symbol means
- Face value
- Amount repaid at maturity.
- Coupon rate
- Annual coupon as a share of face value.
- Years to maturity
- Time until the face value is repaid.
- Yield to maturity
- Return the market demands.
- Yield change
- Shock to test, in percentage points.