With the background about the price volatility characteristics of a bond, we can now turn to an alternate approach to full valuation: the duration/convexity approach. As explained in Chapter 2, duration is a measure of the approximate price sensitivity of a bond to interest rate changes. More specifically, it is the approximate percentage change in price for a 100 basis point change in rates. We will see in this section that duration is the first (linear) approximation of the percentage price change. To improve the approximation provided by duration, an adjustment for “convexity” can be made. Hence, using duration combined with convexity to estimate the percentage price change of a bond caused by changes in interest rates is called the duration/convexity approach.