Option-Adjusted Convexity (OAC)
Second-order price sensitivity through the BDT tree — can be negative for callable bonds near the call price.
OAC measures the curvature of the price-yield relationship after option effects. Like OAD, it bumps the curve ±25bp, rebuilds the tree, and computes the second-order finite difference. For option-free bonds: OAC is always positive (prices are convex in yields). For callable bonds near the call price: OAC can be negative — as yields drop, the bond approaches the call price ceiling and price appreciation slows, creating negative convexity. This is a key CFA Level II concept: callable bonds exhibit negative convexity in the region where the call is in-the-money. For putable bonds: OAC is typically positive and higher than for option-free bonds.
DV01
Dollar change in value for a 1 basis point (0.01%) yield move.
CS01
Dollar change in value for a 1 basis point move in credit spread.
Macaulay Duration
The weighted average time (in years) to receive the bond's cash flows.
Modified Duration
Measures the percentage price change for a 1% yield change.
Convexity
Measures the curvature of the price-yield relationship — how duration itself changes.
Stress Test (Rate Shock)
Estimates impact of large yield moves using duration and convexity.