The percentage change in bond price can be estimated using the duration-convexity formula:
%ΔP=−D×Δy+21×C×(Δy)2
Where:
- D = Modified duration = 23.657
- C = Convexity = 678.98
- Δy = Change in yield = -0.0020 (20 bps reduction)
Substituting the values:
%ΔP=−23.657×(−0.002)+21×678.98×(−0.002)2
%ΔP=0.047314+0.001358=0.04867
%ΔP≈4.87%
The result is positive because a decrease in yield (and a narrowing of credit spread) leads to an increase in bond price. Both the duration effect and the convexity adjustment contribute positively to the price gain.