[Verse 1]
When interest rates start to climb and fall
Bond prices dance upon the wall
Duration tells us how they'll move
A measure that we need to prove
Macaulay counts the weighted time
Till cash flows back, dollar and dime
[Chorus]
Duration, convexity, price sensitivity
Mac-D, Mod-D, and effective too
PVBP shows the basis point view
When rates go up, prices fall down
Duration tells us by how much around
[Verse 2]
Modified duration takes Mac-D
Divides by one plus yield, you see
Effective duration's better still
For bonds with options, fits the bill
Key rate duration breaks it down
By maturity, piece by piece around
[Chorus]
Duration, convexity, price sensitivity
Mac-D, Mod-D, and effective too
PVBP shows the basis point view
When rates go up, prices fall down
Duration tells us by how much around
[Verse 3]
Money duration's dollar terms
Price value basis point confirms
One basis point, how much we lose
PVBP gives us the news
Convexity adds the curve
When duration alone won't serve
[Bridge]
Positive convex, prices rise more, fall less
Negative convex brings more stress
Callable bonds have caps above
Putable bonds, floors we love
Mortgage-backed with prepay risk
Make the convexity more brisk
[Verse 4]
Term structure theories tell the tale
Expectations never fail
Liquidity wants a premium paid
Segmented markets, separate trade
Preferred habitat finds its home
Where investors like to roam
[Chorus]
Duration, convexity, price sensitivity
Mac-D, Mod-D, and effective too
PVBP shows the basis point view
When rates go up, prices fall down
Duration tells us by how much around
[Outro]
Interest rate risk, now you know
How bond prices ebb and flow
Duration and convexity combined
Keep these measures in your mind