Interest Rate Risk of Bond Prices on Macedonian Stock Exchange - Empirical Test of the Duration, Modified Duration and Convexity and Bonds Valuation

TL;DR

This paper empirically evaluates how well duration, modified duration, and convexity predict bond price sensitivity to interest rate changes for Treasury Bonds on the Macedonian Stock Exchange, finding convexity to be more accurate.

Contribution

It provides an empirical assessment of valuation models for T-Bonds on MSE, highlighting convexity's superior predictive accuracy over duration.

Findings

Convexity better approximates bond price changes than duration.

T-Bonds on MSE show low sensitivity to interest rate changes.

High demand and limited supply reduce interest rate sensitivity.

Abstract

This article presents valuation of Treasury Bonds (T-Bonds) on Macedonian Stock Exchange (MSE) and empirical test of duration, modified duration and convexity of the T-bonds at MSE in order to determine sensitivity of bonds prices on interest rate changes. The main goal of this study is to determine how standard valuation models fit in case of T- Bonds that are traded on MSE and to verify whether they offer reliable results compared with average bonds prices on MSE. We test the sensitivity of T- Bonds on MSE on interest rate changes and determine that convexity is more accurate measure as approximation of bond prices changes than duration. Final conclusion is that T-Bonds traded at MSE are not sensitive on interest rate changes due to institutional investors' permanent higher demand and at the same time market limited offer of risk-free instruments.