Modified Duration & Convexity in Excel: Price Sensitivity and Duration Error Explained | SIM Method

In this video, we move from Macaulay Duration to Modified Duration and analyze how well duration estimates actual bond price changes. You will learn how to: ✔ Convert Macaulay Duration into Modified Duration ✔ Estimate percentage price change using duration ✔ Compare the duration estimate to the actual bond price change ✔ Visualize the linear approximation vs the true convex price curve ✔ Understand why duration works for small interest rate changes but breaks down for larger shocks We build a dynamic Excel sensitivity model that allows you to: Shock interest rates up and down Measure estimated price change using Modified Duration Calculate the actual price change Graph the error See convexity in action This is Part 3 of the Advanced Bond Modeling series using the Structured Immediate Method (SIM). Next video: ➡ Yield to Call & Yield to Worst for callable bonds This content reflects the actual workflow used by fixed-income analysts and risk managers, and aligns with CFA Level II bond risk concepts. 🧠 WHAT YOU WILL LEARN The formula and intuition behind Modified Duration How to estimate bond price sensitivity Why duration is a linear approximation What convexity means economically and mathematically How estimation error grows with larger rate changes How to build a duration + convexity sensitivity model in Excel 📊 KEY INSIGHT Duration is accurate for small changes in yield, but convexity explains why the actual price curve is nonlinear. This is the foundation of: Bond risk management Immunization strategies Fixed-income trading analytics Portfolio stress testing 📈 WHAT THE GRAPH SHOWS Straight line → Modified Duration estimate Curved line → Actual bond price Gap between the two → Convexity effect You will see exactly when and why the duration estimate fails. 📂 DOWNLOADS (Optional) Download the Excel sensitivity model used in this video: 👉 logosandmarkets.com 🔜 NEXT VIDEO IN THE SERIES Part 4 – Yield to Call & Yield to Worst: Callable Bond Modeling #ModifiedDuration #Convexity #BondRisk #FixedIncome #ExcelForFinance #CFA #SIMmethod #LogosAndMarkets