FRM Part I · FRM Exam Part I · Applying Duration, Convexity, and DV01
A 10-year zero-coupon bond has an annually compounded yield of 5%. Using the formula for annual-compounding zero-coupon convexity, T(T+1)/(1+y)^2, what is its convexity?
The convexity is about 99.77. For an annually compounded zero-coupon bond it is T times T plus one, divided by one plus the yield squared, so 110 divided by 1.1025.
- A81.63
- B99.77Correct
- C100.00
- D110.00
Explanation
Convexity = 10*11/(1.05)^2 = 110/1.1025 = 99.77. The 100.00 option uses T squared. The 110 option omits the discounting term. The 81.63 option uses T(T-1) = 90 in place of T(T+1) = 110 and divides by 1.1025.
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